Dollar rebounds as yields rise, consumer confidence improves

The dollar gained on Tuesday, giving back earlier losses, as benchmark US Treasury yields hit a four-week high following some weak auctions.

The Treasury Department saw soft demand for sales of two-year and five-year notes. They came after data showed that US consumer confidence unexpectedly improved in May after deteriorating for three straight months.

“The bond market has turned around today and the dollar with it,” said Adam Button, chief currency analyst at ForexLive in Toronto, citing the weak auctions and noting that the improving consumer confidence report reflects “stronger growth.”

US economic data was better than expected in the first quarter and so far there are no major signs of deterioration in areas such as the labor market, which some traders are waiting on before taking a more bearish view on the greenback.

Concerns that inflation will remain stubbornly above the Fed’s target for longer are also providing some support for the US currency. Tuesday’s data showed that worries about inflation persisted and many households expected higher interest rates over the next year.

Minneapolis Federal Reserve Bank President Neel Kashkari said on Tuesday that the US central bank should wait for significant progress on inflation before cutting interest rates and added that the central bank could potentially even hike rates if inflation fails to come down further.

Consumer price inflation showing that prices increased less than expected in April briefly boosted hopes that the Fed is closer to cutting rates, but Fed officials have stressed that they want to see several more months of progress before easing policy.

“The Fed is in no rush to cut rates,” said Button. He added, “the American economy is uniquely strong. It’s tough to bet against the US dollar until the weakness is confirmed.”

This week’s main US economic focus will be personal consumption expenditures due on Friday, which is the Fed’s preferred inflation measure.

The dollar index was last up 0.03% at 104.59, after earlier dropping to 104.33. The euro gained 0.01% to USD 1.0859. Sterling weakened 0.05% to USD 1.276.

The European Central Bank’s Francois Villeroy de Galhau on Monday confirmed market expectations that, barring major surprises, a first rate cut next week is a done deal. But investors have recently updated their bets on future ECB moves, pricing in less than a cut in every quarter in 2024 and early 2025.

German inflation data due on Wednesday and the wider euro zone’s reading on Friday will be watched for clues on how soon easing from the central bank could come.

The greenback gained 0.18% against the Japanese yen to 157.15 yen.

The Bank of Japan’s three key measurements of underlying inflation all fell below 2% in April for the first time since August 2022, data showed on Tuesday, heightening uncertainty over the timing of its next interest rate hike.

The BOJ will proceed cautiously with inflation-targeting frameworks, Governor Kazuo Ueda said on Monday, noting that some challenges are “uniquely difficult” for Japan after years of ultra-easy monetary policy.

In cryptocurrencies, bitcoin fell 2.48% to USD 67,860.42.

(Reporting by Karen Brettell; Additional reporting by Stefano Rebaudo and Alden Bentley; Editing by Ana Nicoladi da Costa and Matthew Lewis)