Dollar slides as Treasury yields slip from alluring levels

April 20 (Reuters) – An overbought dollar suffered a broad setback against other major currencies as the U.S. 10-year Treasury yield dove after nearly trading 3%, and record high German producer prices reinforced the need for ECB rate hikes.

The Fed’s beige book late on Wednesday was in line with prior Fed and market assessments that inflation must be dealt with through a series of rate hikes and balance sheet rundown that’s largely been priced into yields and the dollar.

Wednesday’s Fed speakers suggested the Fed’s on a path to get its policy rate to neutral by year-end, but they’re not expecting inflation to retreat to the Fed’s average inflation target of 2% this year, and maybe not for five years.

U.S. MBA and existing home sales data showed some dampening effects from 30-year mortgage rates at 12-year highs and soaring prices, but inventories remain exceedingly tight, so a near-term downturn looks unlikely.

Meanwhile the war in Ukraine shows no sign of abating and China’s growth faces property and pandemic lockdown headwinds nL3N2WA0Y2 that are weighing on its stock market and the yuan.

With it all, Fed funds are seen peaking above 3% next year and EURIBOR is seen peaking not far above 1.5% and only reaching roughly 10bps by the end of this year versus Fed funds at 2.6%.

As such, unless the U.S. economy and inflation weaken faster than expected, EUR/USD will remain weighed down by deeply negative Bund-Treasury yield spreads.

EUR/USD was up 0.6% with twin intraday peaks at 1.0867, just above the daily tenkan at 1.0857; a line prices haven’t closed above since the Mar. 31 swing high session.

Though there is some broader risk of the overbought dollar index coming in for a bigger correction, this will only look likely if support by today’s lows can be closed below.

USD/JPY, by far the most overbought major dollar pairing, was down 0.9% after rattling off yet another 20-year high at 129.43 in Asia as the BOJ reaffirmed its 25bp cap on 10-year JGB yields, only to then tumble with 10-year Treasury yields.

The urge to book some long profits, with specs their most net long since 2018 and prices their most overbought since 2014, was enough to drag prices down to 127.465 on EBS by hourly cloud base support. The daily on-close pivot point is at 126.98 from Tuesday’s low, with prices yet to close below a pivot point since Mar. 4.

Secondary on-close support is the 10-DMA, last at 126.09, with the last close below that line also on Mar. 4. The kijun support is well below at 123.80.

There is some concern that Japan’s MOF might become proactive in the yen’s defense above either 130 or 135, though it would take a less accommodative BOJ to back up any FX intervention.

Sterling road the dollar sell-off’s coattails up 0.5% and away from recent repeated failed attempts to print a sub-1.3000 close or breach interim Fibo support at 1.2970.

A close above Monday’s high and the daily tenkan at 1.3060/61 would give the short-covering bounce more traction, with the kijun at 1.3136 the key on-close resistance.

The Australian and Canadian dollars were up about 1%, benefiting from both the USD’s retreat and a rebound in risk-acceptance.

Bitcoin and ether were modestly lower.

(Editing by Terence Gabriel. Randolph Donney is a Reuters market analyst. The views expressed are his own.)