Dollar dips as U.S. Treasury Yields retreat from 5% peak

The U.S. dollar edged lower on Monday against a basket of currencies as U.S. Treasuries erased earlier losses, with 10-year U.S. Treasury yields retreating after briefly breaching the 5% level.

The Euro led the pack, surging 0.67%, closely followed by the Pound, which gained 0.54% against the greenback.

Market participants are now looking ahead to the release of U.S. GDP data, a European Central Bank (ECB) meeting, and the Federal Reserve’s preferred inflation gauge. “A big week of data with eyes on U.S. GDP on Thursday, plus BoC (Bank of Canada) and ECB (European Central Bank) in the mix, and of course geopolitical risk remaining incredibly elevated is really denting traders’ desire to do much as the week gets underway,” noted Michael Brown, a market analyst at Trader X in London.

The spotlight of the day, however, was the yield on 10-year U.S. Treasuries, which briefly reached as high as 5.021%. This marks the latest stage of a relentless sell-off in government bond markets, primarily driven by investors accepting that central banks will maintain persistently high interest rates, especially in the United States, combined with an increase in the supply of bonds and widening term premia. The 10-year yield was last recorded at 4.905%.

The dollar index, which measures the currency’s strength against a basket of six rivals, fell by 0.49% to 105.64. The index had previously risen as high as 106.33 earlier in the session.

The surge in U.S. Treasury yields since mid-July has made the U.S. dollar more attractive relative to other currencies, leading to a more than 6% increase in the U.S. dollar index. “On paper, it should be a good week for the dollar. US GDP should come in at over 4%, and the Fed’s preferred measure of inflation should still be running hot,” said Chris Turner, ING’s global head of markets. “In Europe, PMIs and the ECB bank lending survey should show an economy mired in stagnation, if not recession.”

Barclays analysts, however, expressed some doubt about the dollar’s potential for further gains. They pointed to overextended long dollar positions and the decreasing likelihood of further increases in long-dated yields without a reassessment of the Fed’s rate outlook.