US Dollar Soars As Surging Yields Attract Massive Demand

• Dollar Soars as 10 Year Yields Rise 10%
• Stocks Collapse, Driving Risk Currencies Lower
• AUD Hit the Hardest by Risk Aversion
• Euro the Most Resilient
• US Personal Income and Spending Numbers Next

The U.S. dollar is reaping the benefits of rising yields. Since the beginning of the year, we’ve seen ten-year bond yields in the U.S. move from 0.91% to a one-year high of 1.56%. This trend started at the turn of the new year but gained significant momentum in the past few weeks. At first, currency and equity traders resisted the move with stocks powering to record highs and the dollar continuing its slide but today, investors are finally waking up to the ramifications of rising interest rates. U.S. policymakers say they aren’t concerned but the spike in yields has a direct impact on consumer rates. Mortgage rates for example rose to its highest level since August which could put an end to the refinancing boom.

U.S. dollar banknote with map

Image Source: Unsplash

Yields are rising because investors are optimistic. They believe a strong sustainable recovery is right around the corner and prices will rise as demand comes roaring back. In this type of environment, bond yields should be higher regardless of whether the Fed raises interest rates. Currencies are particularly sensitive to interest rates which explains why the U.S. dollar had such a significant reaction to the 10% spike. The same is true for stocks. Rising yields increase borrowing costs and affects the discretionary incomes consumers. One to one and a half percent is a big increase on a percentage basis, but on an absolute basis, it is still very low. It took some time for the dollar and stocks to respond, but we could see a multi-day rise in the greenback and a corresponding slide in equities.

The U.S. is not the only country experiencing rising yields. Ten-year German bund yields also climbed to their highest level in 11 months. In contrast to the Federal Reserve, European Central Bank officials say they are closely monitoring the evolution of long-term nominal bond yields. They will ensure that they remain favorable according to ECB member Villeroy. With the ECB more eager to act on rising rates than the Fed, EUR/USD should be trading lower. Unlike other major currencies that fell sharply today, EUR/USD was unchanged but it should only be a matter of time before the pair turns lower as well.

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