US Dollar Index climbs back near its 18-month high as yields rise

The US Dollar Index pushed back toward its highest level in roughly 18 months in the middle of last week, as a renewed surge in US Treasury yields reinforced the greenback's yield advantage over its main rivals. According to FXStreet, the index climbed back to 102.50 on Wednesday, matching the 18-month peak it had set on Monday, before easing to trade near 102.35.

The move in currencies was driven primarily by the bond market. The yield on the US 10-year Treasury note touched 5.35% on Wednesday, its highest level since April 2002, while the 30-year bond yield reached a 24-year high. A separate FXStreet report put the long bond at 5.724%, describing the repricing as a sign that investors were demanding a larger premium to hold US government debt amid inflation and fiscal policy concerns.

Several factors were cited for the jump in yields. Brent crude moved back above $100 a barrel after Iran stepped up attacks on tankers in the Strait of Hormuz, and more expensive oil tends to feed through into inflation expectations, prompting bond buyers to seek higher compensation. Supply was also a factor: investors sold Treasuries ahead of Wednesday's $39 billion auction of new 10-year notes, a typical pattern as dealers make room for incoming paper.

Developments in Europe added a second leg to the dollar's advance. Investors sold French government debt and rotated into German Bunds as the safer alternative, which kept the German 10-year yield near 3.5%. That left the US 10-year paying more than 1.8 percentage points above its German equivalent. Because foreign investors must buy dollars before buying dollar-denominated bonds, a widening spread of that size mechanically supports demand for the currency. FXStreet noted that the euro, which carries roughly a 58% weighting in the US Dollar Index, accounted for about three-quarters of the index's climb.

The dollar's recent run has been persistent rather than abrupt. The index rose for three consecutive weeks from a low near 98.60 struck on September 9, and Wednesday's step-by-step advance from below 102.00 recovered all of Tuesday's slide to the 101.75 area. The 102.50 level has so far acted as a ceiling, with rallies stalling there on both Monday and Wednesday.

Gold moved in the opposite direction. FXStreet reported that the metal gave back Tuesday's gains and receded toward levels just above the $4,000 per troy ounce mark on Wednesday, with the pullback coming alongside the firmer dollar and higher yields. Gold pays no interest, so rising nominal and real yields raise the opportunity cost of holding it, while a stronger dollar makes the metal more expensive for buyers using other currencies. Earlier in the week, a market briefing from Rio Times recorded gold easing 0.08% to about $4,134 an ounce as the 10-year yield rose to 5.31% and the dollar index firmed to 102.18.

Interest-rate expectations remain a central variable. FXStreet reported that market-implied odds of a Federal Reserve rate increase in December were holding near 85%, even as traders leaned toward a pause at the October meeting. Attention has turned to the minutes of the most recent Federal Open Market Committee meeting for further detail on how policymakers are weighing inflation risks against growth.

By Friday, data compiled by Trading Economics showed the dollar index around 102.23, after the gauge slipped earlier in the session as Treasury yields fell following a well-received 30-year bond auction. The episode underscores how closely the currency and gold markets are currently tracking moves at the long end of the US yield curve, and how sensitive both are to incoming inflation data, energy prices and the Treasury's issuance calendar. Past moves in yields, the dollar or gold do not determine how these markets will behave in future sessions.

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