Investing.com – The dollar’s recent rate-driven climb was halted Monday by falling bond yields that could continue to drop as temporary boosts to rates ease ahead of testimony from Federal Reserve chairman Jerome Powell later this week.
The U.S. dollar index, which measures the greenback against a trade-weighted basket of six major currencies, fell by 0.21% to 91.69, as U.S. bond yields fell, with the U.S. rates falling below 1.7% after hitting 14-month highs last week.
The move lower in rates comes just days ahead of further clues on monetary policy as Powell and Treasury Secretary Janet Yellen are set for two-day testimony before Congress starting Tuesday at 10 AM ET.
Ahead of the testimony, Powell reiterated the central bank’s dovish stance in a WSJ op-ed. “At the Fed, we will continue to provide the economy with the support that it needs for as long as it takes,” Powell said. “I truly believe that we will emerge from this crisis stronger and better, as we have done so often before.”
The expected testimony comes a week after the Federal Reserve kept rates unchanged and forecast rates to remain near zero at least through 2023. In a press conference that followed the Fed’s rate decision, Powell shrugged off the recent spike in bond yields, and made it clear that the central bank wasn’t thinking about scaling back, or tapering, its $120 billion monthly bond purchases.
The Fed’s dovish policy stance triggered some on Wall Street to suggest the market is too bearish on bond prices, which trade inversely to yields, or rates, and a correction would soon follow.
“[W]e don’t think that higher inflation will deter the fed from staying the course … we think the market-implied pricing of rate hikes has gone too far and is due for correction,” Morgan Stanley (NYSE:MS) said, referring to current market bets that a rate hike occurs in late 2022 followed by two 25 basis points hikes in 2023.
As well as an expected decline for the odds of earlier rate hike, temporary factors that have driven the recent boost in rates will continue to subside and keep a lid on rates.
The recent price action has been driven by several factors including “overnight selling … and U.S. banks holding back demand – all of which are “likely to temper or reverse,” Morgan Stanley added, and reiterated its neutral stance on the dollar. “We remain overall neutral on the dollar index .. but we see USD-positive risks potentially growing for a broadening of FX weakness versus the dollar.”
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