Monex: Dollar starts new month on the defensive due to falling US bond yields

March 1, 2021

This is a commentary by Ima Sammani, FX Market Analyst at Monex Europe.

EUR

The euro traded softer against G10 peers this morning as Purchasing Managers’ Index figures failed to impress the currency ahead of the European Central Bank’s announcement of purchases under the Pandemic QE programme. The data release comes after several ECB officials voiced concerns around the rising bond yields and their impact on financial conditions in the eurozone. If markets perceive the increase in purchases as insufficient, Italian BTP yields may see another increase, widening the BTP-Bund spread. A larger increase than expected means Italian bond yields may fall. Overall, however, the purchases may not have a large impact on the euro as one week of increased purchases in an ever-changing environment may not provide markets with enough clues on a potential shift in the ECB’s stance. 

USD

The dollar started off the month on the back foot as Friday’s decline in Treasury yields continued this morning after last week’s spike. The slowdown in yields may be soothing central bankers’ jitters over rising real rates, although the move may signal more volatility rather than an actual pause in the overall bond market rout. Federal Reserve Chair Jerome Powell is set to speak on Thursday this week after he stated last week it may take more than three years to hike interest rates. So far, the Fed has reiterated its view that inflation expectations rising won’t be negative if it’s due to increased growth expectations. With President Joe Biden’s $1.9tn relief package now having passed the House on Saturday and being up for a Senate vote later this week, the question will be whether Powell and other Fed policymakers will push back against the rise in yields, as many market participants have voiced concerns around the size of the package and the odds of overheating the economy.