Dollar Retains Strength on Rising Yields; Nonfarm Payrolls Eyed

The dollar pushed higher in early European trade Tuesday, helped by rising U.S. Treasury yields, but traded below last week’s peak with investors waiting for Friday’s key U.S. employment release for clues on the Federal Reserve’s thinking over bond-buying tapering.

At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 94.015, just below the 94.504 level seen last week, its highest level since September 2020.

USD/JPY rose 0.3% to 111.17, EUR/USD fell 0.2% to 1.1597, and GBP/USD fell 0.1% to 1.3594. The risk sensitive AUD/USD fell 0.4% to 0.7257 after the Reserve Bank of Australia reiterated it doesn’t expect to raise interest rates until 2024 after keeping its monetary policy steady, as expected, at its latest meeting.

The dollar has benefited from climbing bond yields as investors fretted about the lack of agreement in U.S. Congress over the country’s debt ceiling with American politics seemingly as partisan as ever.

The benchmark 10-year U.S. Treasury note now yields close to 1.50% after President Joe Biden said late Monday that he cannot guarantee the government will not breach its $28.4 trillion debt limit, as the United States faces the risk of a historic default in just two weeks.

Also helping the dollar has been a spate of recent data which have painted a picture of a fading pandemic and a recovering economy, fuelling expectations that the Federal Reserve could start tightening its monetary policy sooner than expected.

With this in mind, the focus for most of this week will be on Friday’s nonfarm payrolls release, with the Fed undoubtedly looking for a stronger recovery in the labor market following August’s disappointing release.

This labor release is expected to show continued improvement in the job market, with a forecast for 488,000 jobs to have been added in September, up from 235,000 jobs added the previous month.

“Almost everyone likes the greenback right now, and it’s easy to explain why: investors are waiting for the U.S. Fed to back up its words about an early reduction of the Quantitative Easing (QE) program with actions,” said Dmitriy Gurkovskiy, an analyst at RoboForex.

Elsewhere, the Reserve Bank of New Zealand is scheduled to make its latest policy decision on Wednesday, and is expected to hike by 25 basis points, while the Reserve Bank of India will hand down its own policy decision on Friday. The central bank of Romania is also expected to become the latest in central and eastern Europe to raise interest rates.