The US dollar retreated from an 18-month high on Thursday following a steep decline in Treasury yields, which pressured the currency, while cautious comments from Federal Reserve officials eased expectations for an October rate increase despite raised inflation data.
Currency Moves and Bond Yields
The dollar index, which tracks the US currency against a basket of counterparts, dropped 0.2% to 101.99, shedding most of the previous week’s gains after robust inflation data propelled it to an 18-month peak. This shift helped the euro rebound 0.6% from an 18-month low to $1.1223, marking its largest rise in almost two months. Sterling gained 0.4% to $1.3250, recovering from a 13-month trough. The surge in US government bonds lifted the 10-year yield to 5.0933% while the 30-year yield fell to 5.4462%, both reaching three-week lows.
“The dollar has gone down in a hurry … we think the biggest factor has been the decline in 30-year yields,” said Rodrigo Catril, senior FX strategist at National Australia Bank. “If the decline in yields were to extend, the dollar could struggle, but at this stage it would suggest that the dollar is probably going to consolidate” with expectations for Fed hikes still high, he added.
Market sentiment turned risk-off as the CPI report reinforced bets on sustained higher Fed rates and reignited concerns over AI companies’ significant debt, prompting safe-haven buying in Treasuries. A group of Fed officials, including Vice Chair for Supervision Michelle Bowman and San Francisco Fed President Mary Daly, indicated the central bank could delay action until clearer data emerges before the October 27-28 meeting, easing rate hike wagers.
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Market Outlook and Data Watch
“Despite the whole CPI number coming slightly stronger than expected, I think markets have sort of taken the view that maybe it was not hot enough to force the Fed’s hand for October,” said Khoon Goh, the head of Asia research at ANZ. “(The) October (meeting) is also just a few days before the midterm elections as well,” he added. “And that’s possibly why the market doesn’t want to be more aggressive in pricing in for October.”
Focus now shifts to US producer price and retail sales data later today, with the former expected to show a rise in business costs. Investors will also monitor Fed officials, including Chair Kevin Warsh, at the IMF-World Bank annual meetings in Bangkok for signals on future policy.
The Japanese yen strengthened to 157.675 per dollar while the Swiss franc rose 0.8% to 0.8282. The offshore yuan edged up to 6.6926 per dollar after data revealed China’s factory-gate inflation surged last month due to higher commodity prices. The Australian dollar traded at $0.6952, down 0.3%, after September’s employment unexpectedly declined. The kiwi advanced 0.6% to $0.5626.
