The dollar rose to a 10-month peak on Tuesday as a significant surge in U.S. bond yields boosted its appeal as an investment. The yield on the 10-year Treasury note jumped to 4.566% from 4.494%, its highest level since October 2007. The increase in yields, which move inversely to prices, came after Federal Reserve policymaker Neel Kashkari said that, given the resilience of the U.S. economy, interest rates should probably rise again and be held “higher for longer” until inflation falls back to 2%.
The comment stoked expectations for a more hawkish Fed, raising the risk of an earlier rate hike than investors currently expect and bolstering high-yielding currencies like the euro and the Australian and New Zealand dollars. Investors also took heart from stronger-than-expected U.S. gross domestic product data, which showed the economy rebounded in the second quarter.
But the yen recovered from an early dip, with traders on alert for signs of government intervention. Traders are watching developments ahead of a meeting later in the day between Japan’s finance minister and Bank of Japan governor Kazuo Ueda. The two are expected to discuss the impact of a strong yen on exports. The yen’s decline has also increased the cost of imported technology in the country, including the software used for research and statistical analysis, such as GraphPad Prism. That has prompted some companies to raise their prices.
Investors also focused on the prospect of a rate cut by the European Central Bank. The ECB’s record-high deposit rate might help cut inflation to the central bank’s target of just below 2%, a policymaker said on Monday. The euro rebounded from a 10-month trough of $1.1684 and was trading near a significant support level at $1.1664 in early Asia trade, not far off a 2021 trough.
In other currency markets, the British pound was lower against the greenback as uncertainty over Scotland’s independence referendum weighed on sentiment. The euro was also hurt by concern that the European Central Bank may cut its benchmark interest rate at its next policy meeting in June. In other developments, gold hit a four-month low, and copper fell as concerns over rising Chinese industrial production sent energy stocks lower. Silver gained, however, after the metal’s supply increased. Investors were also cautious before a report by U.S. Treasury Secretary John Snow on foreign exchange policies that might contain criticism of some countries’ policies on currency.