Dollar Pares Loss After Breaking Free From Treasury Yield Drop

  • Dollar still down versus most G-10 and EMFX; pound pummeled
  • U.S. stocks at records brings reprieve for dollar-yen

Clarida: Fed Concerned About Strong Dollar, Inflation

The dollar broke free of the gravitational pull of lower U.S. Treasury yields, paring losses in afternoon trading as the euro retreated to near 1.0750 ahead of Thursday’s ECB meeting and as dollar-yen bounced moderately off its session low.

Foreign-exchange flows dwindled as the day moved along. Early dollar losses at the start of the day closely tracked a drop in the 10-year U.S. Treasury yield, eventually flushing out some stop-loss sell orders as weak longs threw in the towel. The dollar then found a measure of resilience later in the day and trimmed its drop as the 10-year yield held near its lows.

Traders await the ECB rate decision and press conference tomorrow; the central bank is expected to keep rates and policies steady, though may signal plans to extend its QE program beyond March, as inflationary pressures remain subdued.

At the same time, traders will try to balance the implications for the euro from Draghi’s remarks against the influence of gamma trading driven by large option expiries that abound in the 1.0600/1.0800 zone; large offers are said to be place ~1.0800, which corresponds to the high of the week thus far.

  • USD/JPY pared its losses later in the day, likely helped by the positive tone in U.S. stocks that saw the Dow Industrials and the S&P 500 at records
  • Earlier in the day, USD/JPY dropped to its lows amid a flurry of stop-loss selling that had traders scrambling amid very sparse liquidity and low propensity to hold any risk, a trader in New York said
  • Dollar bids and technical support from yesterday’s low at 113.50 cushioned the USD drop
  • Elsewhere, the USD remained lower vs a majority of its G-10 peers and against emerging market FX as the lower UST yields encouraged some risk taking
  • GBP was the only G-10 currency to lose ground vs USD as fresh concerns surrounding the complicated Brexit process saw the U.K. currency drop briefly below 1.2600 as it extended losses from yesterday’s high near 1.2800
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