Dollar rallies as U.S. economic optimism boosts Treasury yields

NEW YORK (Reuters) – The dollar rose against major currencies on Tuesday and climbed to a one-year high against the yen as increasing U.S. vaccinations and plans for a major stimulus package stoked inflation expectations and lifted U.S. Treasury yields.

FILE PHOTO: U.S. One dollar banknotes are seen in front of displayed stock graph in this illustration taken, February 8, 2021. REUTERS/Dado Ruvic/Illustration/File Photo

Benchmark 10-year Treasury yields rose to 14-month highs on Tuesday at 1.776%, and were last up 2 basis points on the day at 1.742%.

Treasury yields are rising a day before President Joe Biden is set to outline how he intends to pay for a $3 trillion to $4 trillion infrastructure plan.

“The acceleration of the vaccine rollout and the size of the infrastructure plan are causing yields to rise and the dollar is benefiting,” said John Doyle, vice president of dealing and trading at Tempus Inc. in Washington.

The safe-haven dollar found support across the board as investors also digested the fallout from the collapse of highly leveraged investment fund Archegos Capital.

The dollar index rose above the 93 mark and was last up 0.4%at 93.288. It hit a high of 93.357, its highest level in four months.

The dollar also rose above 110 yen, a level not seen since March last year, and was last up 0.5% on the day at 110.375 yen. The greenback was on track for its best month since late 2016.

Analysts said the yen was also vulnerable to higher inflation expectations in the United States than in Japan and a rise in long-term U.S. yields. The dollar/yen pair typically has a positive correlation with long-term U.S. yields.

The euro, meanwhile, weakened on the day to $1.1711, its lowest level since early November. It was last down 0.3% to $1.1728.

Tougher coronavirus curbs in France and Germany have dimmed the short-term outlook for the European economy. A widening spread between U.S. and German bond yields is adding pressure on the euro.

The spread between U.S. and German 10-year yields has widened the most since January of last year.

Investors will watch closely the monthly U.S. non-farm payrolls on Friday, with Federal Reserve policymakers so far citing slack in the labor market for their continued lower-for-longer stance on interest rates.

“In a week when the market is feeling so optimistic about the forthcoming payrolls release, it seems very likely that the greenback will find strong support,” Rabobank currency strategist Jane Foley wrote in a report.

However, “the market is in danger of pricing in too much inflation risk,” meaning “we see scope for the USD to soften in the months ahead,” the report said.

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