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Dollar tracks Treasury yields lower as Fed stays on hold

SINGAPORE : The dollar fell broadly on Thursday, tracking a slide in U.S. Treasury yields as markets grew more convinced the Federal Reserve was done with its aggressive monetary policy tightening cycle after it left rates unchanged.

The Fed on Wednesday held interest rates steady as widely expected, as policymakers struggled to determine whether financial conditions may be sufficiently tight to control inflation.

However, Fed Chair Jerome Powell acknowledged that a recent market-driven rise in Treasury bond yields, home mortgage rates and other financing costs could have their own impact on the economy as long as they persist.

The decision lifted sentiment in Wall Street, which spilled over into the Asia day, giving a small boost to the risk-sensitive Australian and New Zealand dollars.

The Aussie rose 0.5 per cent to a three-week high of $0.6426, while the kiwi similarly jumped more than 0.5 per cent to hit a two-week top of $0.58825.

The dollar edged broadly lower alongside U.S. Treasury yields which touched multi-week lows in early Asia trade.

“It seems to us that the FOMC is now in hold mode, albeit in a hawkish way, rather than simply on pause,” said Wells Fargo chief economist Jay Bryson. “That is, we think the bar to further rate increases is higher now than it was a few months ago.”

The two-year U.S. Treasury yield, which typically reflects near-term interest rate expectations, slid to a nearly two-month low of 4.9250 per cent on Thursday, while the benchmark 10-year yield fell to an over two-week low of 4.7070 per cent.

Against the dollar, the euro rose 0.18 per cent to $1.0589.

The U.S. dollar index fell 0.11 per cent to 106.34.

Traders also drew further conviction that U.S. rates could have peaked after data showed U.S. manufacturing contracted sharply in October, though separate data pointed to a still-resilient labour market, which is likely to see the Fed keeping rates at restrictive levels for longer.

“We will likely need to see some labour market weakness before target inflation is reached,” said Lon Erickson, portfolio manager at Thornburg Investment Management.

“This could take some time to develop and is one reason we are likely to see higher rates for longer.”

Market pricing shows a nearly 15 per cent chance that the Fed could begin cutting rates as early as next March, according to the CME FedWatch tool, compared with a roughly 10 per cent chance a week ago.

The move lower in the dollar brought some respite for the yen, though it remained on the weaker side of 150 per dollar.

The Japanese currency last stood at 150.44 per dollar, having slid to a one-year low of 151.74 per dollar earlier in the week in the wake of the Bank of Japan’s (BOJ) monetary policy decision.

Investors were still struggling to digest the implications of the central bank’s piecemeal tweak to its controversial bond yield control policy – a move that has sent Japan’s bond market and currency reacting in divergence.

“This almost feels like the end of the line for YCC, but the extent to which the BOJ will intervene in the JGB market should 10-year yields rise above 1 per cent is as yet unclear,” said Tom Kenny, senior international economist at ANZ.

“We think the BOJ will be content to let longer duration yields move higher in an orderly manner and that intervention is likely to occur if moves are volatile.”

Elsewhere, sterling rose 0.35 per cent to $1.2192 ahead of the Bank of England’s rate decision later on Thursday, where expectations are for the central bank to keep rates on hold.

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