On Higher Yields, The Dollar Outperforms Its Peers

Higher inflation forecasts and higher bond yields increased the dollar’s attractiveness against its peers on Monday, with the New Zealand dollar breaking the trend thanks to excellent statistics.

On Monday, US Treasury yields firmed, continuing a recent trend that saw five-year bond yields rise to their highest levels since February 2020 as investors increased their wagers that the US Federal Reserve would hike interest rates as soon as next year.

The outlook for inflation has sparked predictions of a more rapid tightening of worldwide monetary policy, with Danske Bank forecasting 2 price hikes from the Fed in the second half of next year.

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“For a lot longer, our central thesis has been that 2 variables, notably worldwide economic slowing and the Fed adopting a gradual path toward eventual rate hikes, would combine to boost the dollar,” HSBC analysts wrote in a note. “This happened sooner than we anticipated.”

The dollar index climbed 0.1 percent to 94.02, edging closer to last week’s one-year peak of 94.563, the best since September 2020.

In New Zealand, where customer prices have risen at their quickest rate since 2010, analysts believe the central bank will need to maintain its rate hike path even if the lockdown in Auckland is extended.

After a decade-high quarterly inflation report, the kiwi soared nearly 0.5 percent to a one-month high of $0.7105 before sliding back to level at $0.7070.

To keep inflation under control, the Bank of England will have to take action.

Sterling also managed to retain its ground after Bank of England Governor Andrew Bailey’s hawkish weekend remarks, in which he stated policymakers “would have to intervene” if rising energy prices drive up consumer prices.

As inflation concerns rise, Bank of England Governor Andrew Bailey delivered a new signal on Sunday, indicating that the British central bank is preparing to hike interest rates for the first time since the outbreak of the coronavirus epidemic.

Bailey said he still believes the current increase in inflation is only temporary, but that a leap in energy prices will push it higher and prolong its rise, heightening the risk of greater inflation expectations.

As the entire economy returns from its COVID-19 lockdowns, producing scarcity of supplies and staff, and the cost of energy surges, the Bank of England has estimated that Britain’s inflation rate will rise beyond 4%, more than double its target.

Investors believe the Bank of England will be the first of the world’s major central banks to raise interest rates, maybe later this year or early in 2022.

In other news, China’s economic growth slowed to its slowest rate in a year in the third quarter, with factory output hampered by power shortages, while crude prices surged more than 1% to challenge 2018 highs. If want to know more on oil trading read our beginners guide on Oil Trading

Following the release of the report, the Yuan eased somewhat. However, investors appear to be wary as they prepare for a rough period due to China’s slowdown, power shortages, and global indicators that pressure from rising energy costs is hurting.

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