US recap: EUR/USD down on Treasury yield rise, haven dollar demand

Oct 19 (Reuters) – The dollar index rose about 1% on Wednesday as record euro zone and 40-year-high UK inflation heightened recession fears, sending safe-haven flows into the US currency.

Meanwhile, 10-year Treasury yields rose to 14-year highs, adding to support for the dollar.

The recent pullback in gilts yields due to the government’s fiscal U-turn and the BoE’s attempts to calm markets persisted, but in curve-flattening fashion after the BoE said that QT beginning on Nov. 1 will not involve maturities beyond 20-years.

Investors shrugged off more weak US housing data, with a fourth consecutive 75bp Fed rate hike still priced in for Nov. 2 and the early 2023 terminal rate now by 5%.

Gilts yields eased on hopes the worst of the UK pension fund crisis is over nL8N31K53F but have become a drag on sterling as Treasury and bund yields rise to new long-term highs.

Sterling fell 1% to tenkan support just above Monday’s 1.1175 low.

EUR/USD fell 0.9% toward tenkan support at 0.9753 amid Wednesday’s risk aversion.

USD/JPY was up 0.4% to its highest since 1998 and very nearly at major psychological resistance at 150. The gain in Treasury yields was unopposed by BoJ-corralled JGB yields and no willingness to lift rates to help the MoF’s interventions to support the yen.

USD/JPY cleared technical hurdles near 149.50. Another bout of Japanese selling would be viewed as a buying opportunity unless materially weaker US employment and inflation data pointed to a nearer peak in Fed funds and Treasury yields.

USD/CNH and USD/CNY were up 0.66% and 0.39%, with the offshore yuan making record highs and USD/CNY close to September’s 14-year highs, as the Chinese economy struggles with a weakening property sector, ongoing COVID lockdowns and widening Treasury yields spreads over Chinese government debt. Also worries about delayed China economic data releases.

(Editing by Burton Frierson; Randolph Donney is a Reuters market analyst. The views expressed are his own.)