Dollar Climbs on High Yields Ahead of U.S. CPI Release

© Reuters.

By Peter Nurse

Investing.com - The U.S. dollar surged higher in early European trade Tuesday, supported by high U.S. bond yields ahead of the release of the latest consumer inflation data, which should cement a rapid pace of tightening by the Federal Reserve.

At 3:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 100.155, just below last week's near two-year high of 100.19.

The dollar has been supported of late by the expectation that the U.S. central bank will continue to tighten monetary policy after lifting its benchmark rate by 25 basis points in March, but at a more rapid rate to combat soaring inflation.

This has resulted in the yield on benchmark 10-year notes climbing to 2.836% earlier in the session, its highest since December 2018, before steadying. If Tuesday's early advance holds, it will be the eighth straight session of gains for benchmark yields.

These expectations of hefty interest rate increases are likely to be underpinned by the latest consumer price data, at 8:30 GMT (1230 GMT). The March release is expected to show a gain of 8.4% after a 7.9% gain in February, up 1.2% on the month, while the core data, which excludes food and energy prices, is seen up 6.6% on the year and 0.5% on the month.

Also of interest will be comments from Fed Vice Chair nominee Lael Brainard later in the session. Last week Brainard said the Fed could start reducing its balance sheet as soon as May at a rapid pace. 

USD/JPY rose 0.3% to 125.72, near its June 2015 peak of 125.86, while a move past that level would take the dollar to its highest against the yen since 2002.

While expectations are strong that the Fed will hike aggressively this year, the Bank of Japan has repeatedly intervened to keep benchmark bond yields around zero.

USD/CNY edged slightly lower to 6.3680, softening after earlier reaching a two-week high as some COVID restrictions were eased in Shanghai.

“Asia itself was potentially caught in a pincer movement of higher U.S. interest rates and slowing China growth which slightly lower oil prices were not offsetting,” said Jeffrey Halley, senior market analyst at OANDA. “We can expect more Asian currency weakness ahead as the region's central banks tinker with tightening monetary policy. Those pressures may well magnify in May as the FOMC rolls up its sleeves and gets to work.”

EUR/USD fell 0.2% to 1.0867, handing back some of the gains seen Monday after Emmanuel Macron won the first round of the French presidential election, just beating far-right challenger Marine Le Pen.

The single currency still remains under pressure from the war in Ukraine, with the sanctions put in place to penalize Russia continuing to play havoc with commodity prices, and thus inflation.

The European Central Bank meets on Thursday and has the difficulty of balancing soaring consumer prices, with German CPI climbing to 7.3% on the year in March, against pressure on growth from the Ukraine conflict. 

GBP/USD fell 0.2% to 1.3009, despite Britain's unemployment rate falling to 3.8% in the three months to February, down from the previous reading of 3.9% and below its 4.0% level in early 2020, shortly before COVID-19 cases first swept Europe.