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Title: Dollar Gains on Soaring Yields; Sterling Slumps on Political StrifeJun

Jun 07, 2022 02:51AM ET

By: AnalysisWatch

The US dollar rallied in early European trading on Tuesday after the Reserve Bank of Australia sharply increased interest rates, sparking fresh inflation worries and pushing up US bond yields.

At 2:50 a.m. EDT (0650 GMT), the dollar index, which tracks the greenback against a basket of six other currencies, was up 0.2 percent at 102.623.

On Tuesday, the Reserve Bank of Australia raised its key interest rate by 50 basis points, a tighter measure than the 25 basis point hike expected, and pledged to do "whatever is necessary" to reduce inflation.

AUD/USD climbed to 0.7243 before losing most of the gains and settling at 0.7199, up 0.1%.

The fact that Australian policymakers felt the need to hike interest rates by half a percentage point caused jitters ahead of Friday's US consumer price data, especially after the good US employment data late last week.

The release of the May CPI will give further clues as to the Fed's path to raising interest rates ahead of next week's monetary policy decision, and there are growing fears that upward pressure on prices will persist for longer, which could force the Fed to take more hawkish action.

The yield on the 10-year US Treasury bond last traded at 3.047%, a level seen for the first time in almost four weeks.

This caused USD/JPY to rise 0.6% to 132.69 and climb to a new 20-year high, with yield differentials weighing on the yen as Japanese counterparts are pegged near zero.

EUR/USD fell 0.1% to 1.0688 after German factory orders fell 2.7% on the month in April, suggesting that the Eurozone’s largest economy is expected to contract at least quarterly.

However, the main focus is on Thursday's meeting of the European Central Bank, which is expected to set the stage for a rate hike at the July meeting.

GBP/USD retreated 0.5% to 1.2469 after British PM Boris Johnson survived a no-confidence vote overnight, but remained very weak.

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