By Peter Nurse
Investing.com - The U.S. dollar edged higher in early European trade Tuesday, climbing to a 20-year high against the Japanese yen, as U.S. Treasury yields rise in the expectation of strong U.S. economic data, cementing sharp interest rate hikes.
At 3:20 AM ET (0720 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher at 100.873. The index rose as high as 101.02 earlier in the session, passing 101 for the first time since March 2020.
The Federal Reserve raised interest rates by a quarter percentage point at its March meeting and since then has flagged a more aggressive move in May, with recent data showing consumer prices rising 8.5% in March, the fastest annual increase since 1981.
Federal Reserve Bank of St. Louis President James Bullard said on Monday the central bank needs to move quickly to raise interest rates to around 3.5%, and it shouldn’t rule out rate increases of 75 basis points.
“More than 50 basis points is not my base case at this point,” Bullard said, pointing to such a move by the Fed under Alan Greenspan in 1994. “I wouldn’t rule it out, but it is not my base case here.”
The expectation of sharp interest rate hikes has resulted in U.S. bond yields soaring, with the benchmark 10-year Treasury yield trading on Tuesday at 2.851%, hovering just off its three-year high of 2.884% hit Monday.
“The markets are pricing central bank actions rather aggressively at this point and interest rates have risen quickly,” said analysts at Nordea, in a note.
This has helped the dollar climb to a 20-year high against the yen, with USD/JPY up 0.8% to 128.06, not far removed from its highest level since May 2002.
In direct contrast to the hawkish stance of the Fed, the Bank of Japan has been intervening to keep the yield on Japanese 10-year government bonds no higher than 0.25%.
Elsewhere, EUR/USD edged higher to 1.0783, just off last week's two-year low of 1.0756, while GBP/USD was largely unchanged at 1.3007, just above its 18-month low against the dollar, also hit last week.
The euro and sterling are feeling the impact of the war in Ukraine, with Russia launching a new offensive in the east of the country.
The World Bank lowered on Monday its global growth forecast for 2022 by nearly a full percentage point, to 3.2% from 4.1%, citing the impact of the war, and it’s the European continent which will feel the most significant impact.
AUD/USD rose 0.4% to 0.7380, helped by the minutes from the Reserve Bank of Australia's April policy meeting, published earlier Tuesday, suggesting the central bank was edging closer to raising interest rates for the first time in more than a decade.