US Yields Resume Rise But Dollar Is Slow To Follow

U.S. Treasury yields came roaring back on Wednesday after a brief consolidation at the start of the week. The nearly 6 percent rise in 10-year rates drove the U.S. dollar higher against most major currencies. However, there’s no doubt that the dollar rally is losing momentum as the euro settles with modest losses and sterling outperforms the greenback. U.S. data was also disappointing, raising concerns for Friday’s jobs report. According to private payroll provider ADP, 117K new hires were made in February, significantly less than the 177K forecast. Service sector activity also slowed with the ISM index dropping to 55.3 from 58.7. The employment component of the report, which has a strong correlation with NFPs dropped to 52.7 from 55.2. Economists were hoping that February would be a better month for jobs and while we still expect non-farm payrolls to rise above 100K, today’s reports suggest that it may fall short of the 180K forecast. The prospect of weaker NFPs could weigh on the dollar, especially USD/JPY whose latest rally took the pair right up to the 100-week SMA 107.25, an important resistance level.

U.S. dollar banknote with map

Image Source: Unsplash

The reflation trade should remain a big story. There’s room for more upside as vaccines are just being rolled out and the stimulus package is in the works. When all of these pieces fall into place, the reflation trade could gain momentum. Yields can’t rise forever but even with some correction, the path of least resistance should be higher. The U.S. economy isn’t doing poorly – according to the Beige Book, economic activity expanded modestly from January to February.

In Europe, the euro ended the day unchanged versus the U.S. ECB sees no need to react drastically to the rise in bond yields according to a report. This sentiment echoed by ECB member Weidmann but he also feels that the central bank could adjust the pace of PEPP purchases if needed. With retail sales in Germany slowing and the composite PMI index revised lower, the rise in yields is a bigger problem for the Eurozone than the US. EURUSD has been incredibly resilient and could rally if NFPs miss but in the long run, the EZ lags the recovery which could become a problem for the currency.

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