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Dollar nurses losses as ‘mean reversion’ trade widens

The dollar nursed losses near a one-month low on Wednesday as strong demand at a U.S. bond auction fuelled a widespread drop in Treasury yields, reducing the interest rate advantage the greenback held over other major currencies.

While rate differentials between U.S. and German benchmark 10-year yields have narrowed slightly to 193 bps from more than 200 bps at the start of the month, they remain considerably higher than 150 bps seen at the start of the year.

April has been a month of “mean reversion” trades among major currencies with the yen and the euro recovering most of their sharp losses sustained in March. Even commodity currencies including the Aussie and the kiwi dollar have bounced strongly.

Compounding the dollar’s losses has been a broad pick-up in inflationary pressures that showed U.S. consumer prices rising by the most in more than 8-1/2 years in March at 2.6%.

But that pick-up has failed to translate into expectations of an acceleration in policy tightening and on the contrary has boosted demand for U.S. debt as investors bet inflation pressures are transitory.

December 2022 futures contracts are signalling a slower rise in implied interest rates, reflecting the Fed’s resolve to keep policy on hold.

“The Fed’s continued commitment to loose monetary policy remains a key assumption behind our view that it is still too premature to expect a sustained U.S. dollar rally at the current juncture,” MUFG strategists said.

Federal Reserve Chair Jerome Powell was scheduled to speak later on Wednesday at the Economic Club of Washington; his comments on inflation will be keenly watched as he had previously said higher pressures in the coming months would be transitory.

In London trading, the dollar edged 0.1% lower versus a basket of its rivals to 91.75, its lowest level since March. 19. After peaking at a 4-1/2 month high of 93.43 at end-March, the greenback has declined 2% as Treasury yields eased.

The dollar was particularly vulnerable against the yen and the euro, with the single currency threatening to rise above the psychologically important level of $1.20 for the first time since early March.

“Increasing vaccination trends in April and May will likely give a further boost to the euro/dollar exchange rate,” said Vasileios Gkionakis, head of FX strategy at Banque Lombard Odier.

Elsewhere, the New Zealand dollar rose 0.8% to a three-week high at $0.7110 after the country’s central bank held its official interest rate and asset purchase programme steady, as expected.

The Singapore dollar rose 0.25% to S$1.3376 after the Monetary Authority of Singapore (MAS) left its exchange-rate policy settings unchanged.

In cryptocurrencies, bitcoin touched a record high of $64,895 ahead of the listing of cryptocurrency platform Coinbase on Nasdaq later on Wednesday.

Graphic: Dollar positions,

Reuters GraphicSource: Reuters (Reporting by Saikat Chatterjee; Editing by Kirsten Donovan/Mark Heinrich)

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