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Dollar Surges as Rising U.S. Yields Drive Safe-Haven Demand

The U.S. dollar scaled a two-week peak against major currencies on Thursday, driven by a sharp rise in Treasury yields and increased demand for safe-haven assets amid market volatility.

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The greenback strengthened to a two-week high against the euro and extended its recovery from a two-month low against the British pound, following a significant two-day, 15-basis point surge in long-term Treasury yields, which surpassed 4.6%.

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Triggered by a series of stronger-than-expected economic data and poorly received Treasury auctions, the resulting market turmoil has spooked investors, leading to a steep decline in global equities and a shift towards safer assets.

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The dollar index, which tracks the currency against six major peers, including the euro, sterling, and the Japanese yen, climbed to 105.17 on Thursday, its highest level since May 14. This follows a 0.5% gain in the previous session.

While countries globally have been debating USD dependence, it still remains a safe haven,” TD Securities strategists wrote in a note, explaining the basis for their medium-term stronger USD view. They highlighted that U.S. securities “are still considered the asset of choice in times of uncertainty given high liquidity, stable democratic institutions, deep banking systems, and treatment of most domestic institutions as ‘too small to fail’ with government help ready at hand.”

The euro slipped to $1.079375, its lowest since May 14, and sterling fell to $1.2696, continuing its decline after reaching $1.2801 on Tuesday, a level last seen since March 21.

The yen, however, recovered from an overnight four-week low of 157.715 per dollar, last trading at 157.36. Japan’s currency has been on a downward trajectory this month, nearing a 34-year low of 160.245 reached a month ago. This prompted a swift rebound, suspected to be due to two rounds of dollar-selling intervention by the Ministry of Finance and the Bank of Japan.

Expectations for Federal Reserve interest rate cuts this year have diminished amid persistent inflation, underscored by a surprise rise in consumer sentiment data on Tuesday. Traders currently see a 56.6% probability of a quarter-point cut by the end of the September meeting, down from 57.5% a week ago, according to CME Group’s FedWatch Tool.

Revised U.S. GDP figures are scheduled for release later in the day, followed by the week’s main economic event, the Personal Consumption Expenditures (PCE) price index on Friday, the Fed’s preferred inflation measure.

“The deepening rout in the U.S. bond market is fast becoming the BOJ’s worst nightmare, necessitating hurried consideration about the appropriate level to intervene for a third time this year,” Tony Sycamore, senior analyst at IG, wrote in a report. He added, “The bond market bogey is well-positioned to wrest deeper control of the broader market, particularly if upcoming growth and inflation data are on the firmer side of the ledger.”

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