Dollar falls as U.S. Yield curve shrinks

Dollar falls as U.S.

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The dollar sank on Monday, retreating from a one-and-a-half-year high reached on Friday, as hawkish remarks by a Federal Reserve member over the weekend pushed the yield curve to its flattest levels in three months.

While the Fed’s meeting last week clearly signalled a rate hike in March, some investors believe officials are prepping the markets for a faster pace of rate rises this year to keep inflationary pressures at bay.

A faster pace of rate hikes is also seen as dampening future growth expectations, a scenario that is being played out in the bond markets, where spreads between two and ten-year U.S. Treasury bonds have widened significantly.

Though markets remain concerned about the impact of the Fed’s planned rate hike trajectory on GDP and inflation, some investors saw Fed’s Bostic’s latest remarks as an opportunity to profit from the dollar’s recent rally.

A faster pace of rate hikes is also perceived as depressing future growth forecasts, as seen by the fact that the margin between two and ten-year US Treasury yields has fallen below 59 basis points.

After surging to a mid-2020 high of 97.44 on Friday, the greenback fell 0.2 percent to 97.02 against a basket of competitor currencies. Last week’s 1.6 percent increase in the dollar was the greatest weekly gain since mid-2021. This year, long dollar positions stayed near their all-time highs.

Before a central bank policy meeting on Tuesday, the Australian dollar was among the early gainers against the faltering USD, rising more than 0.5 percent to $0.7043.

On Thursday, the European Central Bank will hold a policy meeting. While no policy change is likely, commentators are beginning to warn that the ECB’s window for action will be narrowed as the Fed’s rate hikes near.

Bitcoin was trading above $37,000 in cryptocurrencies following a calm weekend for the digital asset.

The Bank of England meets on Thursday, with expectations of a second rate hike in less than two months as the BOE reverses additional monetary stimulus after inflation reached its highest level in nearly three decades.

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