Key points:
The U.S. dollar saw a strong performance on Tuesday, supported by rising U.S. Treasury yields. Benchmark 10-year Treasury yields surged by nearly 14 basis points to 4.479% overnight.
Analysts attribute this move to expectations of former President Donald Trump winning the U.S. presidency again, potentially leading to higher tariffs and increased government borrowing.
Picture: 10-year Treasury yields surged, trading at 109.29 on the VT Markets app.
As a result, the dollar rose against various currencies. The euro, which had experienced a small rally following the first round of France’s election, fell back and last traded at $1.0735. This adjustment reflects market stabilisation after the election results aligned closely with polling predictions.
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Trump’s strong debate performance against President Joe Biden fueled expectations of rising inflation. This scenario suggests that yield curves may steepen further, and the USD could maintain its premium.
The Japanese yen experienced a significant decline, reaching 161.72 per dollar on Monday, its weakest point in nearly 38 years. This downward trend continues, primarily driven by the wide gap in interest rates between the U.S. and Japan. In Asian trading on Tuesday, the yen slightly recovered to 161.55 per dollar but remained under pressure, with concerns that Japanese authorities might intervene.
The yen also struggled against the euro, touching a lifetime low of 173.67 on Monday and hovering near that level on Tuesday. The interest rate gap between U.S. and Japanese bonds is substantial, with a 340 basis point difference at the 10-year tenor and a 440 basis point gap at the two-year tenor.
China’s yuan faced similar challenges. After hitting a seven-month low against the dollar last week, it showed little movement. U.S. 10-year yields are more than 220 basis points higher than Chinese government bond yields.
Robust manufacturing data from China and an announcement from the central bank about borrowing bonds to stabilize yields provided only a brief lift to the currency. On Tuesday, the yuan traded at 7.3043 in offshore markets, close to its June low.
The rising U.S. yields have broad implications for global markets. The strength of the dollar could pressure emerging market currencies and impact international trade dynamics. Investors will closely monitor political developments in the U.S. and policy actions from central banks to navigate this volatile environment.
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