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Dollar Boosted by Higher Yields; Inflation Data Due

ForexMay 28, 2021 01:47AM ET

By Peter Nurse – The dollar edged higher in early European trade Friday, helped by rising U.S. bond yields ahead of the release of key inflation data.

At 2:50 AM ET (0650 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was up 0.2% at 90.120.

EUR/USD traded 0.1% lower at 1.2180, slipping after reaching a 5 1/2-month high of 1.2266 on Tuesday, USD/JPY rose 0.1% to 109.92, climbing to its highest levels in about seven weeks, while the risk-sensitive AUD/USD was down 0.1% at 0.7731.

Helping the greenback was a report by the New York Times that President Joe Biden will announce later Friday a $6 trillion budget for 2022 to ensure investments in major infrastructure, education and healthcare projects. If this manages to get through a divided Congress, it would take federal spending to its highest levels since World War II.

Yields on benchmark 10-year Treasurys climbed to around 1.62%, from around 1.58%, on debt supply risks to fund the spending, providing support for the dollar.

The budget proposal came as the U.S. economic recovery appears to gain momentum. On Thursday, the number of Americans filing new claims for unemployment benefits dropped to a post-pandemic low of 406,000, ahead of next week’s widely-watched monthly June payrolls data.

Later Friday comes the release of the Federal Reserve’s key gauge of inflation, core personal consumption expenditures, at 8:30 AM ET (1230 GMT), with a high reading likely to fuel further expectations of policy tightening.

Economists expect core PCE to have jumped 2.9% year-on-year in April, way above the Fed’s nominal target of 2%, compared with a year-on-year rise of 1.8% a month earlier.

Elsewhere, GBP/USD fell 0.1% to 1.4190, retreating slightly after earlier climbing above 1.42 and hitting a three-month high. Fuelling the pound’s gains were comments by a Bank of England policy maker, who hinted at an earlier than expected rate hike by the U.K. central bank.

Gertjan Vlieghe, a member of the BOE’s Monetary Policy Committee, said late Thursday that the central bank was likely to raise rates well into next year, and an increase could come earlier if the economy rebounds more quickly than expected.

“It would probably take until the first quarter of next year to have a clear view of the post-furlough unemployment and wage dynamics, so a rise in Bank Rate could be appropriate soon after, along a slightly steeper path than in my central case,” Vlieghe said.

USD/CNY fell 0.2% to 6.3688, falling to a three-year high overnight and raising expectations that it could hit levels last seen before its shock devaluation in 2015.

“Any signs of independent Renminbi strength could lend weight to the notion that the PBOC wants a stronger currency to insulate against imported commodity price rises. This would be bearish for the dollar,” said analysts at ING, in a note.

Dollar Boosted by Higher Yields; Inflation Data Due

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