Dollar, Yen Up as U.S. Bond Yields Hit Three-Month High

The dollar was up on Tuesday morning in Asia, with the yen trading near an almost three-month low to the dollar, with rising U.S. bond yields attracting Japanese investors.

The U.S. Dollar Index that tracks the greenback against a basket of other currencies inched up 0.07% to 93.448 by 11:54 PM ET (3:54 AM GMT).

The USD/JPY pair was up 0.21% to 111.23, climbing above the 111.07 mark hit on Monday, a level not touched since Jul. 5.

The AUD/USD pair edged up 0.19% to 0.7299, with data released earlier in the day showed that Australian retail sales contracted 1.7% month-on-month in August. The NZD/USD pair inched up 0.01% to 0.7017.

The USD/CNY pair inched down 0.02% to 6.4545 while the GBP/USD pair inched up 0.07% to 1.3704.

The benchmark 10-year U.S. yield briefly topped 1.5% on Monday, a level not seen since June 2021, and the two-year yield rose to its highest since March 2020. This attracted investors from Japan, with 10-year Japanese government bond yields remaining near zero due to the Bank of Japan’s yield curve control policy.

“The main impact of higher Treasury yields on currencies has been to see USD/JPY make further upward progress, now banging against 111,” National Australia Bank (OTC:NABZY) head of FX strategy Ray Attrill said in a note.

“111 will be a tough (nut) to crack, bearing in mind the pair has spent only two days with time above this level so far in 2021, and with 10-year Treasury yield having been as high as 1.77%,” the note added.

The climb in U.S. yield was attributable to the U.S. Federal Reserve’s more hawkish stance in its latest monetary policy handed down during the previous week. The central bank could begin asset tapering as soon as November 2021 and hike interest rates sooner than expected.

Some investors predicted an upward trend for the dollar could continue over time.

“As much as asset tapering in and of itself is not a surprise, an earlier end to its program will reinforce that downside risks to the dollar have diminished,” TD Securities senior FX strategist Mazen Issa said in a note.

“If the last tapering cycle was any indication, about half of the dollar’s cyclical upswing was observed three months afterward,” the note added, with TD expecting the Fed to end its quantitative easing program by June 2022.