U.S. Dollar Touches Fresh Two-year High On Steep Fed Hike View

U.S. dollar and Japan yen notes are seen in this photo illustration June 2, 2017. Reuters / Thomas White

The dollar rose to a fresh two-year high on Monday in thin and choppy trading, in line with higher U.S. Treasury yields, as investors braced for multiple half a percentage-point rate hikes from the Federal Reserve.

Volume was light on the day with Hong Kong, European, Australian and New Zealand markets closed for Easter Monday.

The U.S. rate futures market has priced in a 96% chance of a 50 basis-point tightening at next month's Fed policy meeting, and about 215 basis points in cumulative rate increases in 2022, providing ample support for the dollar.

The greenback also climbed to a new 20-year peak of 126.98 yen versus the Japanese currency, highlighting the contrast in monetary policy between a hawkish Fed and an ultra-dovish Bank of Japan.

The benchmark U.S. 10-year Treasury yield, meanwhile, touched a three-year high of 2.884%.

The dollar index, a gauge of the greenback's value against six major currencies, surged to 100.86, the highest since April 2020. It was last up 0.3% at 100.77.

"There is indeed history that when the Fed plans for hiking and tightening, the buck ends up losing during those cycles, but at the moment there is little in optimism out there that can knock the buck down," said Juan Perez, director of FX trading at Monex USA in Washington.

Speculators' net long bets on the U.S. dollar fell for a second straight week, according to calculations by Reuters and U.S. Commodity Futures Trading Commission data released on Friday. The value of the net long dollar position was $13.22 billion for the week ended April 12. [IMM/FX]

The currency positioning lacked "a clear sense of narrative for the reduction in U.S. dollar bullish sentiment," while a further rise in bearish bets in the Swiss franc and the yen "reflected the U.S. dollar's yield advantage over these two currencies - whose respective central banks remain far from tightening policy," Scotiabank said in a research note.

The yen, on the other hand, earlier came off a 20-year low after both Bank of Japan Governor Haruhiko Kuroda and Finance Minister Shunichi Suzuki voiced concerns about their weakening currency. The rally proved short-lived as the yen hit a fresh 20-year trough in the New York session, and was last up 0.3% at 126.93 yen.

"There's growing speculation about FX intervention to save the yen, although that seems unlikely," Marios Hadjikyriacos, senior investment analyst at forex broker XM, wrote in a research note. "Japan would have to intervene alone since the Americans and Europeans wouldn't agree to weaken their own currencies in this inflationary environment, and Japanese authorities haven't even described the moves as 'disorderly' yet to foreshadow action." Across the Atlantic, the euro, hamstrung by a lack of clarity on when rates in the euro zone would rise, was down 0.3% at $1.0782, just off last week's low of $1.0758, a level unseen since April 2020.

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Currency bid prices at 3:17PM (1917 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 100.7800 100.5100 +0.28% 5.349% +100.8600 +100.5000

Euro/Dollar $1.0780 $1.0810 -0.27% -5.17% +$1.0821 +$1.0770

Dollar/Yen 126.9200 126.5600 +0.30% +10.27% +126.9750 +126.2500

Euro/Yen 136.81 136.63 +0.13% +4.98% +137.0200 +136.4700

Dollar/Swiss 0.9444 0.9436 +0.08% +3.53% +0.9453 +0.9424

Sterling/Dollar $1.3007 $1.3058 -0.38% -3.81% +$1.3064 +$1.3005

Dollar/Canadian 1.2615 1.2616 -0.02% -0.23% +1.2644 +1.2606