Dollar in charge as euro, pound plumb 6-month lows

NEW YORK: The dollar scaled a 10-month high against its major peers on Wednesday, pushing the euro and sterling to 6-month lows and keeping the yen deep in intervention territory, as the prospect of higher-for-longer U.S. rates gripped markets.

U.S. Treasuries stabilised after their recent heavy selloff, though yields remained near 16-year peaks, keeping the greenback solidly bid. The euro was last 0.1% lower at $1.0567, after hitting a six-month low of $1.0555 earlier in the session. The single currency is on track to lose more than 3% for the quarter, its worst quarterly performance in a year.

Sterling was also down 0.1% at $1.2149 after hitting a six-month trough of $1.2135 earlier on Wednesday, and was headed for a quarterly loss of more than 4%. The U.S. dollar index, meanwhile, peaked at a 10-month high of 106.32.

"It's clear now that markets see higher long-term yields in the U.S. for a longer period. That's the main driver for the dollar here," said Dane Cekov, senior FX strategist at Nordea. "It's been a while since we've seen 10-year yields at 4.5%."

Fed officials have in recent days flagged the possibility that the central bank would need to raise interest rates further, after it kept rates steady last week but stiffened its hawkish monetary policy stance. That has sent U.S. Treasury yields to multi-year highs as money markets have adjusted their expectations of where U.S. rates could peak, and for monetary conditions to remain tighter for longer than initially thought.

The benchmark 10-year yield was last at 4.503%, after hitting a 16-year high of 4.566% in the previous session. The two-year yield stood at 5.047%.

YEN ON INTERVENTION WATCH

Elevated U.S. yields have spelt trouble for the yen , which was mired at 149.06 per dollar, close to an 11-month low of 149.185 reached on Tuesday. The dollar/yen pair tends to be extremely sensitive to changes in long-term U.S. Treasury yields, particularly on the 10-year front.

The yen's slow-but-steady decline to the psychological level of 150 per dollar has put traders on high alert for any signs of intervention from Japanese authorities, as officials ramp up their rhetoric against the sliding currency. The 150 zone is seen by some as a red line that would spur Japanese authorities to intervene, like they did last year.

"The fundamental upside pressure (to dollar/yen) from bond yields is simply too great to ignore," said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. "Even if there were intervention, it won't drive dollar/yen down permanently unless bond yields start to retreat in earnest too."

Minutes of the Bank of Japan's July meeting out on Wednesday showed that policymakers agreed on the need to maintain ultra-loose monetary settings but were divided on how soon the central bank could end negative interest rates. Elsewhere, the Aussie fell 0.30% to $0.6380, barely blinking to Wednesday's data pointing to an acceleration in Australia's inflation last month, matching expectations.

"Today's report does nothing to change the dial for the (Reserve Bank of Australia) in my view, who will likely hold rates at 4.1% at their next meeting," said Matt Simpson, senior market analyst at City Index. The Swedish krona has bucked the recent trend, strengthening broadly against the dollar and euro, as the central bank last week announced it would hedge part of its forex reserves to reduce risk.

"The news that the Riksbank would be hedging some of its reserves was a surprise and has been driving the SEK this week," Nordea's Cekov said. The dollar last bought ll.014 krona, having slipped over 1% so far this week and on track for its biggest weekly drop against Sweden's currency since mid-July .