Dollar firms after US yield spike, hits six-month high versus yen

The US dollar touched a fresh six-month high versus the yen and extended a rebound from three-year lows to the Aussie on Thursday, lifted by a sharp increase in US bond yields overnight. Government bonds, and particularly US Treasuries, have become the focal point of markets globally, after traders aggressively moved to price in earlier monetary tightening than signalled by the Federal Reserve and its peers.

Asian stocks extended a global equity sell-off, with risk appetite souring as the surge in yields fomented inflation worries. Emerging-market and commodity-linked currencies continued to retreat Thursday, while cryptocurrencies stabilised after tumbling overnight.

"The market has gotten more and more confident about how strong the global economy could look in the second half of the year, and implied in that is increasing scepticism that central banks will be able to honour the promises they've given that rates are not going anywhere," said Ray Attrill, head of forex strategy at National Australia Bank in Sydney.

"The decline in bonds spooked equities," leading to "classic US dollar safe-haven support," he said. The dollar index edged up to 90.38, holding on to a 0.2 per cent rise from Thursday, when it rebounded from losses of as much as 0.26 per cent before the bond tender. That leaves it down less than 0.2 per cent for the month, following January's 0.6 per cent gain. The greenback was little changed at 106.165 yen after earlier touching 106.43 for the first time since September. It has strengthened 2.8 per cent this year after the first back-to-back monthly increases since mid-2018, putting the yen among the worst performing major currencies in 2021.

Both the dollar and yen are traditional haven currencies, but the yen tends to decline when US yields rise, whereas the dollar tends to strengthen. Bond yields have climbed this year on the outlook for massive fiscal stimulus amid continued ultra-easy monetary policy, led by the US. An acceleration in the pace of vaccinations globally has also bolstered what has become known as the reflation trade, referring to bets on an upswing in economic activity and prices.

In recent days though, a rise in inflation-adjusted bond yields has accelerated, indicating a growing belief that central banks may need to pare back ultra-loose policies, despite their dovish rhetoric. "The fixed income rout is shifting into a more lethal phase for risky assets," after initially being interpreted as a "story of improving growth expectations," Westpac strategists wrote in a client note.

"It appears to be the case that bond markets are 'taking on the central bankers' world view, and standing in front of the current momentum is unwise." The benchmark 10-year Treasury yield surged above 1.6 per cent overnight for the first time in a year, after an auction of $62 billion of 7-year notes was met with weak demand. The Australian dollar continued its retreat after topping $0.80 on Thursday for the first time since February of 2018, declining 0.6 per cent to 0.78195. New Zealand's currency dropped 0.4 per cent to $0.7336 after reaching $0.7463 Thursday, a level not seen since August 2017. The Canadian dollar weakened 0.1 per cent to C$1.2620 after falling from its own three-year top to the greenback at C$1.2468 overnight. The euro slid 0.2 per cent to $1.21475 after touching a seven-week high of $1.22435 on Thursday. Cryptocurrencies remained lower after tumbling overnight.B itcoin changed hands at $46,443 following Thursday's 5 per cent slide, while ether traded at $1,473 following a 9 per cent drop.

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