By Kevin Buckland
TOKYO (Reuters) – U.S. bonds drove currencies on Wednesday, with a rise in long-term rates pushing the dollar to an almost four-year high on the yen, but a decline in shorter-dated yields putting it on the back foot against most other major peers.
The dollar and yen were also under pressure from a global equity rally that sapped demand for assets regarded as safe havens.
The dollar climbed as high as 114.585 yen for the first time since November 2017, with benchmark 10-year Treasury yields touching a fresh five-month high at 1.6630% in Asia. Higher long-term U.S. yields increase the allure of those assets to Japanese investors.
However, two-year Treasury yields hovered around 0.4016% after retreating sharply overnight from Monday’s 19-month high of 0.4480%, signalling a scaling back of bets for early Federal Reserve interest rate hikes.
That contrasted to a rise this week in bets on faster rate increases in the U.K. and New Zealand, which also pulled up expectations in neighbours like the euro zone and Australia.
The risk-sensitive Aussie and New Zealand dollars touched fresh multi-month highs on Wednesday, and cryptocurrency bitcoin hovered close to an all-time high.
“Risk sentiment remains in the ascendancy,” while “a fall-back in front-end U.S. yields, so symptomatic of a slight paring back in expectations for when Fed rates ‘lift-off’ might occur,” dealt the dollar a double-whammy, Ray Attrill, head of FX strategy at National Australia Bank (OTC:NABZY) in Sydney, wrote in a research note.
At the same time, markets are coming to “the – highly belated – realisation that whether the Fed raises (its policy) rate in 2022 or not until later, other central banks are getting in ahead of them … with the Bank of England likely next cab off the rank as early as next month,” Attrill said.
The dollar index – which measures the greenback versus six rivals, including the yen – slipped 0.12% to 93.698, dropping back toward Tuesday’s low at 93.501, the weakest level this month.
Just last week it hit a one-year high of 94.563 as traders priced in a tapering of Fed stimulus as soon as next month, followed by rate hikes next year.
The U.S. economic outlook got a little less rosy on Tuesday after data showed that U.S. homebuilding unexpectedly fell in September and permits dropped to a one-year low amid acute shortages of raw materials and labour, supporting expectations that economic growth slowed sharply in the third quarter.
The euro added 0.15% to $$1.1649 from Tuesday, when it jumped as high as $1.1670 for the first time since Sept. 29.
Sterling rose 0.16% to $1.3810 after touching a one-month peak of $1.3834 in the previous session.
The Aussie traded 0.31% higher at $0.7500, after touching the highest since July 7 at $0.7505.
New Zealand’s kiwi dollar climbed 0.32% to $0.7177, and earlier reached $0.7179 for the first time since June 11.
Bitcoin weakened slightly to just below $64,000 after touching a six-month high of $64,499 on Tuesday, close to its record peak at $64,895.22.
In the equities space, Asia-Pacific stocks extended a global rally on Wednesday, with an index of regional shares adding 0.51%.
“The move in equities has seen the USD and JPY shunned,” Chris Weston, head of research at brokerage Pepperstone in Melbourne, wrote in a client note.
“It’s really just pick a JPY cross and see the ‘rip your face off’ move,” he said. “This is a momentum play here and timing the pullback in JPY crosses is key, but it doesn’t feel like we’re going to see a rush to cover JPY shorts anytime soon in this dynamic.”
Currency bid prices at 0444 GMT
Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid
$1.1649 $1.1632 +0.15% -4.65% +1.1650 +1.1628
114.5450 114.4000 +0.08% +10.84% +114.6950 +114.4700
133.43 133.06 +0.28% +5.13% +133.4400 +133.0200
0.9239 0.9230 +0.12% +4.45% +0.9244 +0.9229
1.3810 1.3790 +0.16% +1.10% +1.3814 +1.3788
1.2337 1.2363 -0.20% -3.11% +1.2367 +1.2338
0.7500 0.7477 +0.31% -2.51% +0.7504 +0.7465
Dollar/Dollar 0.7177 0.7154 +0.32% -0.06% +0.7179 +0.7147
Tokyo Forex market info from BOJ