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Dollar Index Hits 11-mo High

The U.S. dollar rallied to an 11-month high against a basket of its major rivals as upbeat housing data this week assuaged some worries about the sector dragging economic growth lower and suggested that a slightly less dovish tone from the Fed Chair on Friday is possible. The rise in homebuilder sentiment and housing starts this week helped push Treasury yields off of 14-month lows hit on Friday and helped buoy the dollar across the board. This afternoon, investors will turn to the minutes of the Fed’s late July FOMC meeting for further clues on the outlook for monetary policy, but the real insight is likely to come from Friday’s speech by Janet Yellen. Even a slightly less dovish tone from Mrs. Yellen could add to the recent rise in yields and the dollar.

The euro fell to an 11-month low against the greenback below key support overnight. The single currency has trended steadily lower amid mounting expectations that the ECB will likely need to follow up on June’s historic rate cuts with further monetary support to fight anemic growth and deflationary pressures in the 18-member bloc. In contrast, the Fed is inching ever closer to winding down its asset purchase program and eventually, raising U.S. borrowing costs. The divergent economic and policy outlook between the euro zone and U.S. should continue to keep EUR/USD biased lower.

The British pound bucked the trend of an otherwise stronger U.S. dollar overnight after the minutes of the Bank of England’s early August monetary policy meeting showed that two central bankers voted to raise U.K rates. It was the first vote for higher rates by a BOE policymaker in over three years and suggested that hawks within the BOE are beginning to mount an offensive to try to sway the MPC to begin normalizing policy sooner rather than later.

The rise in U.S. Treasury yields by roughly 10 basis points (on the 10-year) above Friday’s 14-month low added to the greenback’s appeal against the yen.

USD: The dollar index rose to a new 11-month peak overnight as rising Treasury bond yields and optimism ahead of two key Federal Reserve events bolstered the dollar. Following a batch of generally lackluster U.S. data last week, the yield on the benchmark 10-year bond fell to just 2.303%, its lowest level in 14-months. Since Friday, two upbeat housing reports have alleviated some worries about the sector acting as a drag on the broader economy and have helped push the yield on the 10-year up to 2.404%. The dollar, which has stubbornly underperformed market expectations for much of this year, has been dogged by depressed yields and an unabashedly dovish Fed. And while Fed Chair Janet Yellen is not expected to stray too far from her well established dovish reputation, a continued insistence on focusing on downside risks to the economy and excess slack in labor markets risks the central bank losing credibility amid mounting signs of a broad-based U.S. recovery. Consequently, investors are positioning for a risk that today’s minutes and Friday’s speech by Mrs. Yellen at Jackson Hole could, even on the margin, sound s slightly less dovish tone than we’ve come to expect from this Fed. Such a scenario should keep U.S. yields and the dollar pointed higher.

EUR: The euro slipped below key support against the dollar to hit an 11-month low overnight. The single currency remains pressured by the view that the ECB will ease monetary conditions in the 18-member bloc further, while the Fed is inching slowly toward more normal monetary policy in the U.S. The tone of U.S. economic data has been decidedly more positive than euro zone reports, which have underscored the very anemic growth and disinflationary backdrop in the bloc. Consequently, euro/dollar should continue to grind lower.

GBP: The British pound rose against the otherwise stronger U.S. dollar overnight after minutes from the BOE’s early August monetary policy meeting showed that two officials voted in favor of higher U.K. rates. Investors had expected that one policymaker would have voted for a rate hike this month. It was the first time any official voted for higher rates in over three years and suggests there is a risk that U.K interest rates could rise before the year-end, a scenario that would limit any further downside risk for the pound.

JPY: The Japanese yen fell to its lowest level in four and a half months against the U.S. dollar overnight. The rise in U.S. Treasury yields this week off of 14-month lows last Friday has bolstered the appeal of dollar assets for Japanese investors. An even slightly less dovish Fed revealed in today’s minuets or Friday’s Jackson Hole speech by Janet Yellen should keep U.S. yields and the dollar biased higher. Following a spat of soft domestic data, the yen remains vulnerable to further losses, especially if elevated geopolitical worries begin to subside.