Dollar Drifts Lower as Treasury Yields Retreat

© Reuters.

The dollar weakened Wednesday as a drop in U.S. Treasury yields took the wind out of the greenback's sails.

At 3:05 AM ET (0805 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was down 0.2% at 89.907, halting its three-day rebound after hitting its lowest level since April 2018.

USD/JPY was down 0.1% at 103.62, EUR/USD rose 0.1% to $1.2220. GBP/USD climbed 0.3% to $1.3697, boosted by the Bank of England Governor Andrew Bailey talking down the prospect of negative rates, while the risk-sensitive AUD/USD was up 0.1% at 0.7778.

Benchmark 10-Year Treasury yields fell nearly 7 basis points from a 10-month high hit on Tuesday following strong demand at a $38 billion 10-year auction and comments from U.S. Federal Reserve officials reiterating that monetary policy is going to stay supportive.

Kansas City Fed President Esther George said on Tuesday that she does not expect the Fed to react if inflation exceeds the central bank’s 2% goal.

“With the Fed’s rate expectations at rock bottom, any further rise in U.S. yields will remain a function of rising inflation expectations or term premium, which leaves us confident on our bearish dollar call,” said analysts at ING, in a research note.

The Democrats claiming the Senate after the runoff elections in Georgia earlier in the month had raised hopes for hefty stimulus measures, largely funded by government borrowing. This resulted in a bond-market selloff that drove U.S. yields sharply higher, helping to stall the dollar’s decline. 

Investors now await U.S. inflation figures for December, with the Consumer Price Index to be released later in the day. Consensus calls for a 0.4% bump from the previous month's 0.2%. The Fed's December Beige Book is also due Wednesday.

There are more Federal Reserve speakers scheduled Wednesday, and traders will be listening for more clues as to when the central bank will start reducing its asset-purchases from their current level of $120 billion a month.

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