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US Treasury yields boost dollar, Powell speech in focus

by Jessica Weisman-Pitts
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US Treasury yields boost dollar, Powell speech in focus

By Amanda Cooper and Stefano Rebaudo

(Reuters) -Rising U.S. yields supported the dollar on Tuesday, with low-yielding currencies such as Japan’s yen and China’s yuan feeling the pressure as investors awaited a speech by Federal Reserve Chair Jerome Powell later in the session.

Benchmark 10-year Treasury yields rose nearly 14 basis points to 4.479% overnight, with analysts linking the rise to expectations that Donald Trump will win the U.S. presidency, in turn leading to higher tariffs and government borrowing.

On Tuesday, the yield on the 10-year note was down 2 basis points on the day at 4.4593%.

“Trump’s better (debate) showing over (President Joe) Biden added to expectations that inflation may pick up pace, yield curves will steepen further and that the dollar may continue to trade at a premium,” said OCBC strategist Christopher Wong.

The dollar index, which measures the U.S. unit against six other currencies, was up 0.15% at 106.00, with the spotlight on economic data and comments from Federal Reserve Chair Jerome Powell later in the session.

“There has been a tendency from Powell to be a bit more optimistic than the FOMC consensus on disinflation, and we think there are some downside risks for the dollar ahead of today’s speech,” said Francesco Pesole forex strategist at ING.

They also look at U.S. JOLTS job openings figures for May, which have decent market-moving potential, analysts said.

As the dollar rose, the euro handed back part of a rally as the first round of France’s election turned out more or less in line with polling. The single currency was last 0.2% lower at $1.0715.

While markets await the second round of French elections during the weekend, their focus has shifted to economic data and the European Central Bank’s monetary outlook.

Euro zone inflation eased last month but a crucial services component remained stubbornly high, fuelling concern that domestic price pressures could stay at elevated levels.

ECB’s President Christine Lagarde said on Monday the central bank needs more time to conclude that inflation is firmly on a path to 2% and benign economic developments indicate that rate cuts are not urgent.

The yen hit 161.745 per dollar on Tuesday, its weakest in nearly 38 years, driven mainly by a wide gap in interest rates between the U.S. and Japan.

Japan’s finance minister said on Tuesday authorities were vigilant to sharp currency market moves, but stopped short of giving a clear intervention warning.

Against the euro, the yen touched a lifetime low of 173.67 on Monday and was just shy of that level on Tuesday, while against the Australian dollar, the yen was near its lowest in 33 years as carry trade remained attractive.

“There is no trigger as such for yen weakness today, rather there is nothing really preventing it,” said Matt Simpson, senior market analyst at City Index.

Robust manufacturing data in China and an announcement from the central bank that it would be borrowing bonds – likely to sell them and steady falling yields, traders said – gave only the briefest fillip to the yuan on Monday.

It was last at 7.307 in offshore trade on Tuesday, within sight its June low.

Sterling neared its lowest in almost two months against a robust dollar on Tuesday, while the euro extended its modest rally over the last week.

The Australian dollar eased 0.14% to $0.66515 with traders weighing central bank minutes, which showed much discussion about whether policy was tight enough to ensure inflation would slow as desired. [AUD/]

Swaps markets pricing implies a one-in-three chance of a rate hike as soon as next month.

(Additional reporting by Tom Westbrook and Ankur Banerjee in Singapore; Editing by Helen Popper and Bernadette Baum)