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Currency Market Analysis

Mar 18, 2021 | Currency Market Analysis

Global Themes

The U.S. dollar rose above two-week lows as Treasury yields climbed to fresh highs. The greenback strengthened against the euro, yen and sterling and tipped toed above three-year lows against the Canadian dollar. The yield on America’s 10-year Treasury note topped 1.70%, the highest since January 2020, after the Fed left policy unchanged but forecast the economy could grow at the fastest rate (6.5%) in decades. Still, the dollar remained in a post-Fed decision hole as the central bank maintained a high bar for an interest rate hike as the majority of officials do not anticipate a rate increase until after 2023. The Fed’s continued low rate pledged exposed a significant vulnerability for the dollar. Nevertheless, the dollar stands to benefit from rising yields and data that back the Fed’s bullish outlook for the economy.


The euro fell Thursday and pared a portion of its Fed-inspired gains after it rallied more than 0.6% Wednesday against the greenback. Gains have been tough for the euro to sustain given that they haven’t been fundamentally driven and largely a function of the weaker greenback. Data this week confirmed that euro area inflation increased by a tepid 0.9% in February, a dangerously low level below the ECB’s near 2% target.


The loonie downshifted from fresh three-year highs as the greenback caught a yield-inspired bounce and the price of one of Canada’s commodity exports, oil, continued to soften below recent peaks. Oil moved below $64, a more than 1% decline on the day. Next to drive the loonie will be domestic retail spending data Friday that’s forecast to decline for a second straight month in January. Weaker retail sales, if realized, would come on the heels of tepid inflation and reinforce the Bank of Canada’s patient, low interest rate stance.


Sterling declined after the Bank of England left policy unchanged while the tenor of its statement sounded a dovish note on the outlook for Britain’s weakening job market. The BOE left its main interest rate at a record low of 0.10%, but flagged that unemployment, currently at 5.1%, would continue to rise “over the next couple of quarters.”


U.S. government bond yields shrugged off mixed U.S. data, allowing the greenback to do the same. Jobs data disappointed as weekly unemployment claims unexpectedly jumped to 770,000 in the latest period compared to forecasts of 700,000 from an upwardly revised 725,000 the prior week. But the Philly Fed index, a gauge of the health of Mid-Atlantic manufacturing, surprised to the upside with a print above 50, one of the strongest in the series’ history, that underscored the economy’s underlying horsepower.

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