U.S. dollar and bond yields retreat on speculation of Fed’s rate hike pause

The U.S. dollar declined for a fifth straight day on Wednesday as Treasury yields fell amid speculation that the Federal Reserve might halt its interest rate hikes following a string of softer commentary on the monetary outlook by policymakers, and the limited impact of the Israel-Hamas military conflict in the global economy.

The DXY-U.S. dollar index, which tracks the value of the greenback against six major peers, hit a weekly low of 105.70 on Tuesday night after the dovish comments from two Fed officials, raising hopes interest-rate hikes may be done for now.

Greenback came off its 10-month high of 107 level hit last week, despite receiving some safety bids following Hamas’ attack on Israel on the weekend, which raised fears of a wider conflict in the energy-rich Middle East and Persian Gulf region.

DXY-U.S. dollar index, 2-hour chart

Dollar weakness triggered a rebound on major peers, with Euro coming off multi-month lows to rise over the $1.06 level, Pound Sterling bounced to nearly $1.23, the beaten-down Japanese Yen rebounded to ¥148.80, while the growth-sensitive Australian and New Zealand dollars bounced to $0.6430 and $0.6050 respectively.

Fed Bank of San Francisco President Mary Daly said tighter financial conditions may mean the central bank “doesn’t have to do as much,” while the Atlanta Fed President Raphael Bostic, said Tuesday he believes current rates are high enough to get inflation back to the Fed's 2% target.

The two Fed officials signaled that the recent surge in bond yields could lead to the tightening in credit conditions the central bank is looking for, which could give policymakers a reason to call an end to raising rates in this cycle.

Based on the dovish commentary by Fed officials and the speculation the US central bank may stand pat until year-end, Treasury yields extended recent losses, retreating their 16-year peak, with the yield on the 10-year Treasury falling 16 basis points to trade near 4.62%, while the yield on the 2-year Treasury broke below the key 5% mark, falling as low as 4.92%.