The US dollar strengthened on Tuesday as Treasury yields maintained the upward push on growing expectations that the Federal Reserve will continue raising interest rates. The greenback has recovered from its first-half decline in just the past month due to traders anticipating a more hawkish central bank. But everything will depend on next month’s jobs and inflation data.
Fed Chair Jerome Powell will deliver the keynote address on Friday at the Jackson Hole economic symposium. Investors are waiting for any fresh clues on the monetary policy outlook, while market analysts think Powell might iterate that the US economy needs to adapt to an environment of higher interest rates.
This belief has been tremendous for the US bond market.
The benchmark ten-year yield has been roughly flat on Tuesday, but it is trading at its highest level since 2007, trending at around 4.32 percent. The two-year yield added 3.9 basis points to 5.031%, the best level in two decades.
Market experts warn that this “pain trade” could spill over into the US economy.
“At what point does the economy effectively break under the weight of real rates? I don’t think we are there yet,” said Gennadiy Goldberg, TD’s head of US rates strategy, in a Tuesday interview on Bloomberg Television. “But I still think that the market is ignoring a lot of this interest-rate pass-through at their own peril.”
It has been relatively quiet on the data front this week. The US housing market continued to show signs of spiraling out of control, with existing home sales sliding 2.2% to 4.07 million units in July. With mortgage rates north of 7%, homeowners are not moving out and are sticking to their residential properties.
Meanwhile, the Federal Reserve Bank of Richmond’s Manufacturing Index remained in negative territory at -7 in August, slightly up from -9 in the previous month. The monthly metric has been in the contraction area all year.
The US Dollar Index (DXY), a gauge of the greenback against a basket of currencies, rose 0.24% to 103.54, from an opening of 103.33. The index is up more than 2% this month and has erased its year-to-date loss.
The USD/CAD currency pair climbed 0.07% to 1.3557, from an opening of 1.3547, at 18:58 GMT on Tuesday. The EUR/USD tumbled 0.37% to 1.0856, from an opening of 1.0896.