US dollar retreats from 10-month high

The US Dollar (USD) pulled back from its highest level since November against a basket of peers on Thursday, after a climb that has brought the yen near a key intervention zone and the euro to an eight-month low, as U.S. longer-dated yields extend their rise.

The dollar index, which tracks the unit against six other majors, was down 0.3% on the day at 106.3, though it was still on track for an 11th straight week of gains, and just off its 10-month high hit on Wednesday.

The index has also gained 2.6% in September so far, which would be its largest monthly rise in a year.

The euro, which has been on the receiving end of the dollar’s strength, rebounded somewhat, up 0.33% on the day at $1.0537 on Thursday, but still not far from its January low of $1.0482, a break past which would take it to its lowest this year.

“If that (January low) goes then we could go a bit closer to euro/dollar parity, but our base case scenario is that unless there’s another negative shock for Europe then that won’t be sustained,” said Lee Hardman, senior currency analyst at MUFG.

Hardman said the euro was weakening, partly because of the stronger dollar on the back of higher US yields and also because of “the cyclical divergence story: the U.S. economy has been more resilient while the European economy has been weaker.”

US benchmark 10-year yields hit 4.642% on Wednesday, their highest since 2007, as markets come to terms with the Federal Reserve’s policy rates staying high for longer.

Federal Reserve Bank of Minneapolis President Neel Kashkari was one among several Fed voices to caution markets on the possibility of more hikes, saying on Wednesday that ample evidence of ongoing economic strength meant that more tightening might be in the pipeline.

Fed Chair Jerome Powell is scheduled to speak later on Thursday, potentially giving markets some clues on the path of U.S. monetary policy.

Economic data coming out of the U.S. continues to defy investor expectations of an economic slowdown.

Also, in the mix for the euro was inflation from major German states suggesting that nationwide inflation is likely to ease significantly in September.

The dollar was also weaker against other currencies. The pound gained 0.5% to $1.2200, leaving it set for its best day since late August, and the dollar fell 0.29% against the Swiss franc, and 0.2% against the Japanese yen, to 149.33.

The Japanese currency has also been weakening sharply, but its softening has been tempered by fears that authorities might intervene to support the currency.

The 150 yen per dollar zone is seen by markets as potentially spurring intervention from Japanese authorities it did last year.

“If it shoots beyond 150 there’s a chance that it could enter a speculative zone…. They certainly don’t want to see it break out because that would mean they’d have to spend even more,” said John Vail chief global strategist at Nikko Asset Management.

Finance Minister Shunichi Suzuki said on Thursday that Japan would not rule out any options if there was any excessive volatility in currency moves, warning against speculative yen moves amid the currency’s fall.

The yen has also been squeezed by a surge in oil prices, which on Wednesday marked their highest settlement in 2023 after a steep drop in U.S. crude stocks compounded worries of tight global supplies.

Though this offered some sucour to commodity currencies, such as the Canadian dollar, last at C$1.3490 to one U.S. dollar.

The US dollar is set for a small monthly fall on the Canadian currency, while the euro is set to decline 2.9% on the month, the pair’s biggest monthly fall since July 2022.