Dollar off its lows

The euro and sterling rose to intra-day highs of close to $1.09 and $1.28 respectively yesterday, but hawkish Fed commentary, stronger than expected US economic data and higher US yields have helped the dollar regain ground. EURUSD is back down at around $1.0850 this morning while the pound has retreated to about $1.2760, leaving EURGBP trading at £0.85 (after it dipped below this level again yesterday).

US 10-year bond yields rose by about 10bps to 4.55%, with weak auction demand for 2-and 5-year government debt adding to the move up in yields, while German and UK yields are nudging up at the start of play today having closed marginally higher yesterday. In equity markets, European stocks shed around 0.6% yesterday, while the S&P 500 recovered from earlier losses to end flat on the day.

Fed member Kashkari says he doesn’t think “anybody has totally taken (interest) rate increases off the table” – however, he believes “the odds of us raising rates are quite low” and expects the Fed to maintain its current restrictive monetary policy stance for “an extended period of time.”

Consumer confidence in the US rose in May according to the Conference Board’s measure, having declined in each of the previous three months, though it still remains well below its levels at the start of this year. Consumers’ assessment of labour market conditions improved this month, helping to lift sentiment.

Economic data due today include money supply/credit growth in the Euro area and CPI inflation in Germany – the consensus expects the headline inflation rate to have risen to 2.7% this month from 2.4% in April – while the Fed publishes its latest Beige Book.