Written by Kevin Buckland
TOKYO (Reuters) – The dollar rose to a two-week high against its major counterparts on Thursday, as a decline in Treasuries improved the currency's appeal due to rising U.S. yields and demand for safe-haven assets.
The dollar surged to a two-week high against the euro and continued its recovery from the lowest level in more than two months to the pound after a 15 basis point jump over two days above 4.6% for long-term Treasury yields.
Spurred by a wave of stronger-than-expected economic data and a series of poorly received auctions, the Treasury market's decline has spooked investors, sending global stocks sharply lower and spurring a rush into safer assets.
The index, which measures the currency against six major currencies, including the euro, pound and Japanese yen, reached its highest level since May 14 at 105.17 on Thursday, after a 0.5% advance in the previous session.
“While countries globally have been discussing reliance on the US dollar, it remains a safe haven,” strategists at TD Securities wrote in a note outlining “the basis for our stronger medium-term view of the US dollar.”
They wrote that US securities “are still considered the asset of choice in times of uncertainty given their high liquidity, stable democratic institutions, deep banking systems, and the treatment of most domestic institutions as ‘too small to fail’ with government aid ready on hand.”
The euro fell to $1.079375 for the first time since May 14, and the British pound fell to $1.2696, continuing its decline after it reached $1.2801 on Tuesday for the first time since March 21.
However, the yen rose from a four-week low overnight at 157.715 yen to the dollar to close in the latest trading at 157.36.
The Japanese currency has seen a steady decline this month, heading towards a 34-year low of 160.245 from last month, triggering a rapid recovery that market participants strongly suspect was driven by two rounds of ministry intervention in the dollar sell-off. Finance and the Bank of Japan.
Expectations of interest rate cuts by the Federal Reserve this year have declined amid signs of steady inflation, most recently with a surprise rise in consumer sentiment in data on Tuesday.
Traders currently see odds of 56.6% for a quarter-point cut by the end of the September meeting, down from 57.5% odds a week ago, according to CME Group's (NASDAQ:) FedWatch tool.
Revised US GDP numbers are due later today, followed on Friday by the week's main macro event, the release of the Personal Consumption Expenditures (PCE) price index – the Fed's preferred measure of inflation.
“The deep deterioration in the US bond market is fast turning into the Bank of Japan’s worst nightmare, necessitating quick thinking about the appropriate level of intervention for a third time this year,” Tony Sycamore, a senior analyst at IG, wrote in a report.
“The specter of the bond market is well positioned to wrest deeper control over the broader market, especially if upcoming growth and inflation data are on the firmer side of the ledger.”