U.S Dollar Takes Up With Short-Dated Treasury Yields Shift High

Despite the slight decline on Friday as high inflation dampened consumer sentiment, the U.S. dollar gained ground on Wednesday as a surprisingly strong inflation print prompted investors to increase their expectations for a rate hike.

As a result, the DXY upside momentum is likely to challenge the 50% retracement of March 2020 to January 2021 downside near 96.1 index points before moving lower into the June 2020 low near 95.7.

Despite surging inflation cutting into households’ living standards, few believe policymakers are doing enough to mitigate the issue, which sent the dollar tumbling on Friday morning.

In early November, the University of Michigan survey showed a fall in consumer sentiment to its lowest level in more than a decade.

Investors were ramping up bets this week that the Federal Reserve might have to raise interest rates sooner than expected as short-dated U.S Treasury yields shifted higher — five-year bond yields reached a record high in February 2020.

Consumer sentiment affected the dollar index at 95.12, which fell as low as 94.991 against a basket of its rivals. This was the highest level since July 2020 earlier in the session.

Since inflation outpaces wages for now, consumers are clearly more concerned about real income growth.

As U.S. yields decline here, the dollar is impacted by growth worries and falling against most currencies, especially the Japanese yen.

In the wake of Wednesday’s data showing that consumer prices rose at the fastest annual pace since 1990, the currency markets have shaken. The data raises doubts about the Fed’s assertion that price pressure will remain transitory.

Despite Friday’s survey raising some eyebrows, strategists remain positive about the dollar, which boasted its largest weekly percentage gain since the week ended August 22.

Earlier in the week, renewed dollar strength persisted in the moribund currency volatility markets, triggering traders to buy options in an attempt to protect themselves from further dollar strength. Friday saw a fresh six-month high for the currency volatility index.

There was a high probability of a second-rate increase by November based on market expectations. In CME data, a rate hike is projected to take place by then with a 50% probability, up from less than 30% just one month earlier.

As a result of a slowing economy and the European Central Bank appearing unlikely to alter its dovish policy settings in the near term, investors have become increasingly bearish on the outlook for the Euro.