Dollar weakens as US bond yields fall
US government bond yields fell quite sharply yesterday after the (US) Treasury announced increased “liquidity support” for the long end of the market. Lower US yields triggered a decline in the dollar, which lost ground across the board. The euro has strengthened to around $1.1680, up the best part of a cent from yesterday morning and its highest level in almost three months, while sterling has gained just over half a cent to trade north of $1.36, its best level since the middle of May. This leaves the single currency slightly firmer against the pound, trading at around £0.8580 this morning.
The US Treasury’s announcement of increased liquidity support for the long end of the government bond market, via a doubling of the size of its buybacks of long-dated bonds, saw 30-year yields fall by around 10bps, reversing most of the run-up in yields over the latter part of last week and early this week, while 10-year yields ended about 6bps lower on the day. Elsewhere, German yields finished broadly flat, while UK yields edged down by 2-5bps led by the very long end of the curve. In equity markets, US stocks rallied initially as bond yields fell but gave up ground subsequently to end just marginally higher on the day, while European indices closed with small losses.
The minutes of the Fed’s July meeting note that the inflation outlook “was highly uncertain and that risks were skewed to the upside (with) many participants assessing that (monetary) policy tightening would likely be necessary if inflation did not decline”. Inflation data published since the end-July meeting were relatively benign though – both headline and core CPI inflation fell for a second month in a row in July – prompting a paring back of the chances for a rate hike at the Fed’s next meeting in September (to around 30%), though the market is still pricing in a full 25bps hike by early next year.
ECB member Rehn says there are “no clear signs of second-round effects” from the energy price shock with “wage growth and the wage outlook remaining moderate”. The market though is still almost fully pricing in a 25bps increase in the deposit rate (to 2.5%) at the ECB’s September meeting and expects a further quarter-point increase by March next year.
It is a quiet day ahead in terms of economic data with construction output due in the Euro area and the regular weekly jobless scheduled in the US. There are a couple of Fed members due on the wires over the course of the day.
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