Dollar Pares Gain, Tracking Dip in Treasury Yields After Auction

  • Correlation to yield tightens after Wednesday’s blowout
  • Peso drops as U.S.-Mexico tensions rise; Swiss franc gains

The dollar scored moderate gains for the session and touched weekly highs against the euro and the yen, though gains were pared slightly as Treasury yields fell after a well-received auction.

The dollar’s slight retreat from its high and its earlier move up signaled that the correlation with Treasury yields remains largely intact, even if more elastic. Concerns about the relationship arose Wednesday when the 10-year Treasury yield rose and the dollar ended the day near its lows, driven by outsized losses against the Mexican peso that spilled over into other pairs.

The Bloomberg dollar index was up 0.5 percent, with the dollar higher against most of its G-10 peers and emerging markets as the 10-year Treasury yield rose to its highest level since Dec. 28 before falling back in afternoon trading.

The dollar lost ground slightly against the Swiss franc amid speculation for M&A-related flows after Johnson & Johnson agreed to buy Swiss-based Actelion for $30b in cash, even though the company said the price was set in USD and that it would pay with funds trapped outside of the U.S.

Haven considerations may have also supported the franc, which rose to its highest against the euro since June amid rising global tensions as the Trump administration forges ahead with new policies, two traders said. Franc gains have led to speculation that the SNB may need to intervene to weaken the currency.

The peso, which surged ~2.5% Wednesday, fell as much as 1.4% against the dollar as Mexican President Pena Nieto canceled a trip to the White House set for next week after President Trump signed an order advancing a border wall between the two countries.

  • EUR/USD dropped to its lowest in a week at 1.0658; bids and stop-loss sell orders were filled under 1.0700 in the drop, said a trader in London who asked not to be identified because not authorized to speak publicly; further stops are in place below 1.0620, just below technical support from the Jan. 20 low at 1.0625
  • USD/JPY rose to a fresh high for the week at 114.86, extending gains from overnight while absorbing offers ahead of 114.00 and triggering stops above 114.50, traders in Europe and New York said; the dollar’s path above 115.00 may be clearer after a large option expiry rolled off today and with few significant nearby strikes to hamper progress
  • Stop-loss buy orders are in place above 115.20, a trader in London said, while tech resistance is likely ahead of 115.62 from the January 19 high; USD/JPY may rise toward 125 by mid-year, TD said
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