Dollar Gains at End of Weak Week; Euro and Sterling Lower

The dollar edged higher in early European trading Friday as Treasury yields returned to their recent highs, but it still looks set to record its first weekly fall in three. The euro and sterling were also in focus after the ECB meeting and the release of U.K. growth data.

At 3:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.4% at 91.755, but just above the 91.364 low seen, the weakest level since March 4.

The index has dropped around 0.4% this week, but has firmed around 2% this year to date as it tracked benchmark 10-year Treasury yields from below 1% to as high as 1.62% at the end of last week. On Friday, the yield stood at around 1.59%, climbing from the 1.55% level seen Thursday.

USD/JPY was up 0.5% at 109.03, while the risk-sensitive AUD/USD dropped 0.5% to 0.7749.

U.S. President Joe Biden signed a $1.9 trillion stimulus package into law late Thursday, a day after the House of Representative gave its final approval, meaning that checks for $1,400 will arrive on the doorsteps of many Americans in the near future.

The dollar, along with U.S. Treasury yields, has been rising steadily due to expectations that the Federal Reserve’s loose monetary policy and fiscal stimulus will stoke inflation.

While this week’s consumer prices data dampened those expectations, recent employment numbers showed a strongly recovering labor market, with last week’s payrolls growing much more strongly than expected and Thursday’s jobless claims fell to the lowest level since the pandemic started.

Elsewhere, EUR/USD fell 0.3% to 1.1945 after the European Central Bank said on Thursday it would accelerate its emergency bond purchases over the next quarter to combat rising European bond yields.

“As long as the whole PEPP [Pandemic Emergency Purchase Programme] envelope is not extended, the negative impact on the euro should be limited as this only changes the pace of the bond purchases, but not the overall size,” said ING analysts, in a research note.

Additionally, GBP/USD fell 0.3% to 1.3943 after the latest growth data showed Britain’s economy shrank by 2.9% in January from December as the country went back into a coronavirus lockdown.

Although this was a smaller drop than expected, it still indicated that the economy was 9.2% smaller than in January last year.

The Bank of England stated last week that Britain’s economy is likely to shrink 4% in the first quarter of 2021, hit by the latest Covid-related lockdowns as well as post-Brexit trade disruptions.