The dollar fell on Tuesday and the euro strengthened as U.S. Treasury yields fell sharply on further dovish comments from Federal Reserve officials and the prospect of a Chinese stimulus package.
The benchmark 10-year Treasury note fell to a session low of 4.618% from Monday’s high of 4.887% after Atlanta Fed President Raphael Bostic said the Fed did not need to raise interest rates further.
In the latest comments from a Fed spokesman this week, Bostic told the American Bankers Association that the Fed’s policies are strict enough and he doesn’t think there will be a recession in the future, even if the Fed raises interest rates to slow the economy and lower inflation.
Joseph Trevisani, a senior analyst at FXStreet in New York, said Bostic was responding in part to the outbreak of violence in Israel and Gaza.
“What you’re seeing is the Fed’s typical, standard and historically repeated response to crises, which is if things get bad in the Middle East, the Fed lowers interest rates,” he said.
“You can almost count on the Fed to incorporate this into its worldview, and that will just lower interest rates.”
U.S. Treasuries rose, pushing two-year yields to their lowest levels in a month, as safe-haven demand was boosted by continued bloodshed in the Middle East and dovish comments from the Federal Reserve.
The euro rose 0.3% against the dollar to $1.0604, while the U.S. dollar index , which measures the greenback against six other currencies, fell about 0.19% to 105.75, well below last week’s 11-month high of 107.34 and having previously hit its lowest level this year. lowest level. moon.
Sean Osborne, chief currency strategist at Scotiabank in Toronto, said, “The focus on term yields and term premiums is going to be a key issue for the dollar because it does suggest that the Fed may not have to act anymore.”
“These are all going to limit the dollar’s gains. Given where yields are right now, it’s hard to say whether there’s going to be any kind of significant decline at this point,” he said.
Traders awaited minutes of the Federal Reserve’s latest policy actions on Wednesday and key U.S. inflation data on Thursday. Investors are also keeping a close eye on the conflict between Israel and the Palestinian Islamist group Hamas, although initial safe-haven purchases of dollars have stalled.
China is reportedly considering issuing at least 1 trillion yuan ($137.1 billion) in additional sovereign debt to boost its struggling economy. Analysts said this would be beneficial for currencies such as the euro that are more exposed to global economic growth.
U.S. bond yields fell sharply on Tuesday when trading reopened after the Columbus Day holiday. Falling global borrowing costs helped lift Asian and European stocks.
The yen fell 0.13% to 148.68 yen per dollar. The yen rebounded after Kyodo News reported the Bank of Japan was considering raising its core consumer inflation forecast for this year, but later gave up gains.
Analysts said the decline in U.S. Treasury yields was initially driven by comments from two Fed officials on Monday who said rising long-term yields could negate the need for further interest rate hikes, as well as traders seeking to Safe haven assets.
The 10-year Treasury yield, which moves inversely to price, fell 12.5 basis points to 4.6571%. Last week it hit its highest since 2007 at 4.887%.
The Israeli shekel traded at 3.9550 against the dollar, just off the nearly eight-year low hit on Monday after the central bank pledged $30 billion to stem a sell-off in the currency.
“They are firmly involved and I think they want to prevent it from trading at level 4,” ING head of markets Chris Turner said.
Israeli airstrikes in Gaza on Tuesday flattened the entire area and filled morgues with dead Palestinians in retaliation for Hamas attacks.
The Swiss franc, a traditional safe-haven currency, traded at 0.9045 against the U.S. dollar, down about 0.21%. Sterling rose 0.40% to $1.2286.
