Dollar, bond yields stand tall on enhanced Fed rate hike prospects

The dollar stood near a three-month high against the yen on Friday after increased chances for a near-term US interest rate hike boosted Treasury yields that had already gained in the wake of a surge in British and euro zone yields.

Upbeat US data, including jobless claims, manufacturing activity and pending home sales, strengthened the case for the Federal Reserve to raise rates by the year-end and lifted the Treasury yields.

US GDP growth data

The markets’ focus now turned towards third quarter US gross domestic product data due out later in the global session.

Asian stocks were subdued, with MSCI’s broadest index of Asia-Pacific shares outside Japan edging down 0.l per cent, reflecting Wall Street’s unconvincing performance overnight.

South Korea’s Kospi shed 0.1 per cent and Australian stocks fell 0.4 per cent. Japan’s Nikkei gained 0.5 per cent on a weaker yen.

Wall Street shared had edged lower on Thursday in a choppy session after the latest round of earnings reports, with a decline in the consumer discretionary sector and interest-rate sensitive stocks outweighing gains in healthcare names.

“Another fairly tepid lead from Wall Street provides Asia with little in the way of inspiration... however, look not to the S&P 500 and more towards the forex and fixed income market, because there is a strong story here,” wrote Chris Weston, chief market strategist at IG in Melbourne.

The dollar slipped 0.15 per cent to 105.115 yen but remained in reach of a three-month peak of 105.350 seen the previous day. It was headed for a weekly gain of 1.2 per cent.

US Treasury yields

In a week marked by deep slides in the prices of US and euro zone debt, the benchmark 10-year Treasury yields climbed to a five-month high well above 1.8 per cent, helped along by the surging British Gilt and German bund yields.

A sell-off in Gilts had led the way on Thursday as strong third quarter UK growth data doused expectations for monetary easing by the Bank of England.

The 10-year Gilt yield has risen about 20 basis points this week, its highest in four months.

The German 10-year bund yield on Thursday soared 10 basis points to 0.19 per cent, its highest since late May.

The bund yield plumbed a record low minus 0.20 per cent in July under the European Central Bank’s extensive monetary easing. But it has recently risen amid concerns that ultra-easy policies practised by major central banks could have their limits and may not be continued indefinitely.

The rise was less pronounced in the 10-year Japanese government bond yield, but it still made a five-week high of minus 0.045 per cent.

BoJ policy stance

The Bank of Japan in September had made a change of tack and now tries to control the yield curve rather than rely on adjusting the pace of its money printing.

The euro inched up 0.1 per cent to $1.0906, holding out better against the dollar compared to the Japanese yen thanks to the big rise in euro zone debt yields.

The dollar index was little changed at 98.823 after rising about 0.2 per cent on Thursday. It was on track to gain about 0.3 per cent this week, having struck a nine-month peak along the way.

Crude oil

In commodities, crude oil added to strong gains from Thursday, when commitments from Gulf OPEC members to cut production assuaged some lingering doubts about cooperation from other producers.

Brent crude was up 0.1 per cent at $50.51 a barrel after advancing 1 per cent the previous day. It was poised for a 2.5 per cent loss this week, during which it hit a four-week low earlier on caution over OPEC’s output negotiations next month.

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