The dollar traded marginally lower in early European trading Wednesday, remaining on the defensive as U.S. Treasury yields retreated, boosting risk sentiment. Sterling will also be in focus ahead of the U.K. budget.
At 3:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.1% at 90.748, hitting a three-week high.
EUR/USD rose 0.1% to 1.2094, USD/JPY was up 0.2% at 106.82, while the risk-sensitive AUD/USD rose 0.1% to 0.7828, adding to recent strong gains after GDP data showed the Australian economy grew much faster than expected in the fourth quarter, up 3.1% on the quarter.
Movements in the global bond market have been very influential in guiding the foreign exchange rates, following last week’s dramatic jump in bond yields amid concerns inflationary pressures would cause central bankers, and the Federal Reserve in particular, to end the easy monetary policies which have been in place since the start of the Covid pandemic.
However, Treasury yields have stabilized this week, with the benchmark 10-year note currently yielding 1.40% after briefly hitting 1.60% last week, with Fed speakers keen to let the market know their accommodative monetary policy stance will be around for a while.
Fed Governor Lael Brainard is the latest to express such an opinion, saying it will take “some time” to meet the conditions needed for scaling back asset purchases. Even so, she admitted that the speed of last week’s move up in bond yields had ‘caught her eye’.
Also boosting risk sentiment was the decision by Texas Governor Greg Abbott to lift the state’s remaining lockdown restrictions, and President Joe Biden’s statement that the U.S. should have enough vaccines for all adults by the end of May, two months earlier than previously thought.
European authorities, meanwhile, have expressed more concern about the difficulties associated with rising yields.
European Central Bank board member Fabio Panetta said Tuesday that the bloc’s monetary authority should expand bond purchases or even increase the quota earmarked for them if needed to keep yields down.
Elsewhere, GBP/USD rose 0.2% to 1.3982 ahead of the U.K.’s annual budget, with Finance Minister Rishi Sunak set to outline the country’s latest taxation and spending plans as it struggles to cope with the financial damage caused by the pandemic.
“Overall, the additional fiscal support to be announced … should underscore the constructive outlook for GBP for 2Q, with the further fiscal help facilitating the economic rebound and making GBP the outperformer in the G10 FX space,” said ING analysts, in a research note.
Additionally, USD/PLN rose 0.1% to 3.7566 ahead of the latest meeting by Poland’s central bank. It is expected to keep interest rates unchanged at a record low as it weighs the impact of accelerating inflation against the threat of new Covid-19 restrictions stifling economic growth.