U.S. Dollar Soars on Rising Treasury Yields, Hawkish Fed Minutes

December U.S. Dollar Index futures posted its best weekly performance since March, closing at 97.997, up 1.343 or +1.39%. The rally was fueled by increasing expectations for a Fed rate hike in December. This was supported by rising Treasury yields and hawkish minutes from the Fed’s September meeting.

Treasury yields rose to their highest levels in four months last week while the Fed minutes showed that the decision to hold interest rates steady at their September meeting was a “close call” but expected to raise them “relatively soon” thereafter.

The week ended with U.S. retail sales and producer price data for September reinforcing expectations the Federal Reserve would raise interest rates in December.

EUR/USD

The EUR/USD plunged to its lowest level since July 27, closing at 1.0969, down 0.0231 or -2.06%. The Forex pair was pressured early in the week by rising U.S Treasury yields which widened the interest rate differential between Treasury Bonds and German Bunds. This made the dollar a more attractive investment.

The steep break accelerated after key support areas were breached. Traders also expressed concerns over this week’s European Central Bank policy decision. ECB President Draghi may tweak the current stimulus package, or announce the tapering of current stimulus measures.

Draghi has to make a precise decision because a wrong move may disturb the financial markets and risk derailing the current economic recovery. Inflation is still at extremely weak levels in the Euro Zone, but last week, the ZEW report showed German economic sentiment improved more than expected in October, boosting optimism over the key component of the Euro Zone economy.

GBP/USD

Support for the GBP/USD continued to erode last week on worries about the possibility of a “hard Brexit” scenario that is seen as leaving Britain out of the European Union’s single market. British Prime Minister Theresa May tried to calm down the markets when she said she would give lawmakers some scrutiny of the Brexit process and would seek “maximum possible access” to Europe’s single market.

Traders did like the comments from Bank of England Governor Mark Carney who said the central bank is not indifferent to the level of the Sterling. “Our job is not target the exchange rate, our job is to target inflation,” Carney said.

Carney also said he is willing to allow inflation to run “a bit” higher than the central bank’s 2 percent target in order to help employment and allow Britain’s economy to grow.

USD/JPY

The U.S. Dollar posted a strong gain against the Japanese Yen last week with the USD/JPY finishing at 104.166, up 1.260 or +1.22%. The rally was primary driven by a widening of the interest rate differential which favors the U.S. Dollar. Simply stated U.S. yields are rising and Japanese rates are stuck in negative territory, making the dollar a more attractive investment.

There was one blemish to the solid uptrend last week, however. Surprisingly disappointing news regarding China’s trade balance drove down global equity markets, sending investors into the safety of the Japanese Yen for a single session.

AUD/USD and NZD/USD

The AUD/USD posted a volatile two-sided trade last week, closing at .7616, up 0.0031 or +0.40%. It was driven lower early in the week by rising U.S. Treasury yields and the weak data from China, but mounted a recovery into the week’s close on increased demand for higher risk assets.

The NZD/USD closed at .7083, down 0.0085 or -1.18%. Sellers continued to pound the currency in anticipation of an interest rate cut by the Reserve Bank of New Zealand in early November.