Dollar underpinned by rising US yields before Fed meets

Westpac is among those expecting the Fed to hike its federal funds rate by 25 basis points – its first increase since 2006 – due to job market improvement, solid growth and sufficient inflation.


“While the rates decision will be the initial focus, it may not be the decisive factor for markets”, wrote Sean Callow, senior currency strategist at Westpac in Sydney, who says investors could also react to changes in the central bank’s forecasts.

Greek bonds were the best performers in the euro zone on Thursday with 10-year yields down 24 bps at 8.44 percent, and two-year yields 42 bps lower at 11.16 percent ahead of elections on Sunday.

However, in the absence of a rate rise, only an extremely dovish message seems to hold much danger for the dollar.

Illustrating that policy divergence, the gap between short-dated U.S. and European yields is at its widest in over eight years.

On Tuesday, the yield on the 2-year Treasury note spiked to a four-year high of 0.78%. Traders say that if the Fed stands pat Thursday, short-term bond yields may fall.

A potential rate hike “would likely be a shock” to short-term Treasurys, according to a Bank of America report released Tuesday.

The greenback had traded higher before the U.S. data, underpinned by lofty U.S. Treasury yields in the wake of upbeat consumer spending data on Tuesday.

The outcome of the two-day Fed meeting continued to grip investors’ attention, particularly after a surprising 0.1 percent decline in U.S. consumer prices in August.

Ten-year Spanish yields were 2.13 percent, while their French equivalent were 1.10 percent. Which means there’ll in all probability be a selloff in one-to-three-year Treasurys, which might push short-term yields even greater, in accordance with the report. The yield on the benchmark 10-year German bond known as the bund, inched 0.9 basis point higher to 0.786%.

“The numbers have been very uneven month-to-month, but when you look through the noise, the core readings have been very respectable for the Fed to be able to raise rates”, said Robert Tipp, Prudential Fixed Income’s chief investment strategist. US interest rates futures implied that the market placed a 27 percent chance of an increase on Thursday, up from 23 percent late on Monday, according to CME Group’s FedWatch program. Economists and investors have been split, and many are skeptical whether the central bank would pull the trigger amid sluggish global economic growth, contained inflation and a recent stock-market swoon.


Whatever the Fed’s determination, “the markets are successfully tightening earlier than the Fed“, Tipp stated, pointing to rising Treasury yields, widening credit score spreads and – all indications that buyers are bracing for the start of a mountaineering cycle.