The U.S. dollar is holding close to a 10-week peak against major currencies, including the yen, as Treasury yields rise to post-financial crisis highs. This has led to speculation that U.S. rates will remain high for a longer period of time.
In an effort to bolster the yuan, China’s central bank has set a stronger-than-expected daily mid-point for the currency. This comes after weeks of mounting pressure on the yuan due to concerns over Beijing’s slow response to a slowing economy and struggling property sector.
The U.S. dollar index, which measures the currency against developed-market counterparts, slipped slightly but remains near its highest level since June. The surge in long-term U.S. yields and China’s underwhelming response to economic stresses continue to provide bullish support for the U.S. dollar.
Market attention is now focused on Fed chairman Jerome Powell’s upcoming speech at the annual symposium in Jackson Hole. If Powell leaves the door open for rate hikes, it could further strengthen the dollar and potentially push the dollar index above 104.
Current money market indicators suggest a less than 50% chance of another 25 basis point Fed hike by November, followed by rate cuts next year.
The dollar-yen pair is sensitive to changes in U.S. Treasury yields, and the benchmark 10-year yield reached its highest level since November 2007 on Tuesday.
The euro saw a slight increase against the dollar, while the offshore yuan remained steady after the central bank’s mid-point adjustment.
The Australian dollar, often influenced by China’s economic performance, remained unchanged but has slowly recovered from recent lows.
According to senior currency strategist Kristina Clifton, a significant Chinese stimulus package focused on infrastructure spending could help reverse the downtrend in the AUD/USD pair.
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