Greenback Nudges Up on U.S. yields, Euro Retreats From One Month Peak

On Tuesday, the greenback edged up against a basket of currencies as U.S. Treasury yields extended their increase in advance of an expected interest rate increase by the Fed Reserve.

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On Tuesday, the greenback edged up against a basket of currencies as U.S. Treasury yields extended their increase in advance of an expected interest rate increase by the Fed Reserve.

The euro pulled back from one month peaks after dovish sounding remarks from European Central Bank officials tempered its recent increase.

With a rate increase already perceived as a done deal, investor concentration was on what kind of a message the Fed Reserve would deliver after its two-day meeting starting later on Tuesday.

“The latest rise in Treasury yields is underpinning the dollar, but it is a wait-and-see mood that is mostly prevailing in the market ahead of the Fed’s decision,” said Shin Kadota, senior currency strategist at Barclays (LON:BARC) in Tokyo.

“Expectations for a hawkish dot plot was a factor that has pushed up the dollar recently, with hopes for the number of times the Fed could hike rates this year having increased to four from three.”

The “dot plot” is policymakers’ rate projections and provides a view into their interest rate outlook.

The dollar index against a group of major currencies (DXY) increased  0.1% at 101.410, adding to modest gains made the previous day.

Having gone to 115.510 on Friday, the U.S. currency was steady at 114.850 yen,  its highest since Jan. 19.

The euro was effectively flat at $1.0651.

On Monday, the  common currency had increased to a one-month peak of $1.0714, increased after some members of the ECB’s Governing Council talk over the possibility of higher interest rates at the previous week’s policy meeting.

But its increase was tempered later on Monday after European Central Bank (ECB) Governing Council member Jan Smets reportedly said the previous week’s policy meeting was not an indication of approaching policy change. Bank of France Governor Francois Villeroy de Galhau also stated increasing inflation in the euro zone was extremely exaggerated.

Caution in advance of the upcoming elections in Holland also capped the euro. On Wednesday, the Dutch will vote  in an election that was seen as a test of anti-immigrant sentiment.

“The market faces a series of event-related risks. It’s hard to predict whether that would be the Dutch elections, the Fed policy decision, (U.S. President Donald Trump’s) budget proposal or the G20 meeting, but the dollar faces significant downside risks,” said Masashi Murata, senior strategist at Brown Brothers Harriman in Tokyo.

Murata added that latest expectations for four U.S. rate increases this year considered excessive, and that the Fed Reserve meeting could help calm exaggerated policy tightening expectations.

On Thursday, the Trump administration’s fiscal 2018 federal budget plan will be released, and then on Friday,  G20 finance ministers and central bankers will meet in Germany.

Sterling was a touch lower at $1.2200, its increased overnight stalling after parliament passed a legislation giving British Prime Minister Theresa May the power to start the European Union  exit process. Theresa May has now cleared the final obstacle standing between her and the beginning of the divorce talks.

The pound had surged 0.4% overnight after Scotland’s First Minister Nicola Sturgeon demanded a fresh Scottish independence referendum, however, stated it should take place at the earliest in late 2018.

The Australian dollar declined 0.15% at $0.7561, giving back some of the previous day’s gains made when the greenback  fell against the euro.

The 10-year U.S. Treasury note yield (US10YT=RR) was at 2.616% after increasing overnight to 2.628%, its highest since mid-December.

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