Dollar Edges Higher as Yields Rise; Euro Receives Macron Boost

The U.S. dollar edged higher in early European trade Monday, helped by continued strength of U.S. bond yields, while the euro received support from incumbent Emmanuel Macron’s lead after the first round of French presidential elections.

At 2:55 AM ET (0655 GMT), the US Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 99.987, continuing to show strength after gaining around 1% last week.

The dollar has received the benefit from a hawkish Federal Reserve, which lifted interest rates by 25 basis points at its March meeting and looks set to continue hiking as the year progresses.

St. Louis Fed President James Bullard, who is on the hawkish side of the debate, stated late last week that the central bank needs to raise the federal funds rate by another 3 percentage points by year’s end.

The benchmark 10-year yield rose again Monday, adding another seven basis points to top 2.77%, as traders positioned for this shift.

“Few central banks will be able to match the pace of Fed tightening this year and the dollar should stay strong – especially against the low yielders of the Japanese yen and the euro,” said analysts at ING, in a note.

USD/JPY rose 0.8% to 125.36, with the yen suffering as the Bank of Japan holds yields near zero, in direct contrast to the Fed’s stance.

However, EUR/USD edged higher to 1.0880, receiving support from the results of the first round of the French presidential election, with incumbent Emmanuel Macron polling the highest number of votes.

Macron will face off against far-right challenger Marine Le Pen on April 24. Opinion polls suggest the race will be very tight, but Macron’s strong start gave some confidence to markets that are wary about Le Pen’s protectionism, even as she no longer backs discontinuing the euro.

The European Central Bank meets on Thursday, and has the difficulty of balancing soaring consumer prices against pressure on growth from the war in Ukraine.

The more hawkish members of the group have been pressing for the central bank to promptly rein in its accommodative policies, but while the central bank could give more details about a wind-down in asset purchases, it’s unlikely to provide any explicit hints about hikes.

GBP/USD fell 0.3% to 1.2993, falling after growth in the U.K. economy slowed more sharply than expected in February, as gross domestic product rose by 0.1%, down from 0.8% growth in January.

AUD/USD fell 0.4% to 0.7429, falling to a three-week low as iron ore prices dropped, while USD/CNY rose 0.1% to 6.3727 on the back of China’s producer price index growing 8.3% year-on-year, with the world’s second-largest economy having to deal with the inflationary pressures from Russia’s invasion of Ukraine and its latest Covid-19 outbreak.