Dollar Rises as Higher US Yields Keep Currency Supported
The US dollar has recovered its bid today following a softer consolidation yesterday. It frequently outperforms when US interest rates are on the rise, in contrast to numerous other significant currencies. However, the dollar’s strength does not reflect the successes on the various fronts where the Trump administration has taken a stance. The conflict in the Middle East has intensified, with reports of several ships being targeted today in the Strait of Hormuz. October WTI is trading at its highest level since May earlier today. The long-end US yields have reached new multiyear highs, even in light of the Treasury’s plan to enhance buybacks commencing this week. The effort to support the yen is being rebuffed as the dollar trades above JPY160, despite high conviction that the Bank of Japan will raise rates late this month. While some reports indicated that Treasury Secretary Bessent advised Japan’s Ministry of Finance and the central bank to consider raising rates, Japanese officials appeared to downplay this suggestion. The Minister of Finance referenced the BOJ Act, which safeguards the independence of the Bank of Japan. The swaps market indicates a strong belief in an impending rate hike by the Bank of Japan. It surpasses the US, which is experiencing more robust growth alongside elevated inflation.
The euro consolidated within the pre-weekend range and reached approximately $1.1620 in North America yesterday. After reaching $1.1625 in Asia Pacific turnover, the euro was sold slightly below $1.1590 in early European turnover. Options for 1.8 billion euros at $1.1600 are set to expire today. A break of the 1.1575 area may target the 1.1530 area. The dollar appreciated as US Treasury yields increased prior to the weekend, reaching JPY160.20, marking the highest point against the yen since the intervention. Treasury Secretary Bessent conveyed that “disorderly” yen movements have the potential to destabilise global markets. While that is certainly possible, it is not the case at present. Recall that prior to the intervention in late July, benchmark three-month implied volatility was below 7%, marking the lower threshold of its range since early 2022. The intervention resulted in an increase in implied volatility to approximately 8.8%, marking its peak since early April. It has returned to approximately 7.5%. Prior to the intervention, the swaps market was anticipating nearly six basis points for a September hike, which has now increased to just over 23 basis points.
Setting theory aside, it is observed that the rolling 30-day correlation between fluctuations in the dollar-yen exchange rate and variations in the two-year US yield stands at approximately 0.25. The correlation of changes in the exchange rate and Japan’s two-year yield is not even 0.05. The dollar is currently fluctuating within the parameters established yesterday, which itself was contained within the bounds set last Friday. The consolidation appears to be favourable for the US dollar. Sterling regained approximately fifty percent of its losses incurred prior to the weekend, which were influenced by Warsh’s remarks. It reached 1.3565 in North America yesterday. It is also recording an inside day today, trading within a range of approximately $1.3530 and $1.3560. It continues to operate within the pre-weekend range of approximately $1.3525 to $1.3600. The intraday momentum indicators are stretched; this leads us to anticipate downside pressure in North America. Options for nearly GBP575 million at $1.3550 are set to expire today.
The US dollar briefly traded at a two-week high against the Canadian dollar yesterday, slightly exceeding CAD1.3910. It relinquished its advances and noted a session low approaching CAD1.3855 in North America. It tested the pre-weekend low, observed prior to Warsh and the robust Q2 GDP, near CAD1.3845 today. The US dollar experienced a recovery, attaining a session high in Europe just above CAD1.3875. Resistance is observed in proximity to the peaks established during the previous two sessions, approximately CAD1.3910. Following a decline prior to the weekend, the Australian dollar exhibited subdued trading yesterday, oscillating within a narrow range of less than 1/5 of a cent, primarily between $0.7155 and $0.7170. The Aussie is exhibiting a bearish outside day. It reached slightly above $0.7080 before being sold to about $0.7140. The daily momentum indicators appear poised to decline from over-bought levels. The next chart area to note is near $0.7100, which appears somewhat distant today, considering the intraday momentum indicators. The 0.7100-level holds nearly A$665 million in options expiring today and more before the end of the week.
