US dollar broadly weaker as sentiment improves

by Jonathan Adams
US dollar

The Australian dollar and the Norwegian Krone held on to advances

The US dollar remained broadly weaker on Wednesday as Treasury yields continued to retreat, restoring some calm to world markets and reigniting demand for riskier assets.

Commodity-linked currencies such as the Australian dollar and the Norwegian Krone held on to significant two-day advances.

The lower US yields also sapped some of the dollar’s attraction among its low-yielding peers, with the yen and Swiss franc rebounding from multi-month lows.

Bonds have been at the centre in financial markets in recent weeks, after a dramatic jump in yields globally in defiance of central bankers’ insistence on patience in normalizing monetary policy as economies recover from the pandemic. Global stocks were knocked from near record highs, and commodities prices fluctuated.

Fiscal stimulus has fuelled market expectations for a rapid economic recovery, with President Joe Biden close to passing a $1.9 trillion fiscal stimulus package.

An index of the dollar against six of its major peers was little changed early in the Asian session Wednesday, after falling from a nearly one-month high overnight.

The Aussie added 0.1 per cent to $0.7824, following gains of nearly 0.7 per cent the previous two days. The currency got additional support from GDP data that topped analyst forecasts.

The Krone was mostly flat after advancing nearly 1 per cent in each of the past two sessions.

Risk sentiment dynamics are the key driver of currencies in general right now, said Shinichiro Kadota, senior currency strategist at Barclays Capital in Tokyo. Equity market reaction will be one of the key determinants of the impact of this move in global rates on FX markets.

The lull in volatility could prove to be temporary if an improving US economy reignites bond selling, with monthly payroll figures due on Friday.

US Federal Reserve Governor Lael Brainard stuck to recent dovish rhetoric overnight, saying there is still a lot of ground to cover on jobs and inflation. But she also said she is “paying close attention” to bond market developments, where “the speed of the moves caught my eye.”

Earlier Tuesday, the Reserve Bank of Australia (RBA) had recommitted to keeping interest rates at historic lows.

Meanwhile, European Central Bank (ECB) board member Fabio Panetta said the bloc’s monetary authority should expand bond purchases or even increase the quota earmarked for them if needed to keep yields down.

The euro was little changed at $1.20910 after advancing more than 0.3 per cent in the previous session, when it rebounded from a nearly one-month low below $1.20.

The dollar gained 0.1 per cent to 106.810 yen, consolidating after retreating from a low of 107 overnight, a level last seen in August.

This article is for information purposes only.
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