Dollar under pressure and all eyes on Treasuries as US fiscal anxiety rises
LONDON/SYDNEY: The dollar headed for its first weekly fall in five weeks against major currencies on Friday and long-dated Treasury yields stayed elevated, as US debt concerns that have mounted for years started driving moves in currencies and global debt.
Investor attention has switched from tariff anxiety to US fiscal concerns in a week where Moody's downgraded the US credit rating and the Republican-controlled House of Representatives on Thursday passed a sweeping tax and spending bill.
Futures contracts tracking Wall Street's benchmark S&P 500 share index were steady in European morning trade as investors balanced the tax-cut boost to corporate earnings with longer-term concerns about the US economy.
"It's good for corporates initially, and clearly you're seeing the flip side of that in Treasury markets," Netwealth CIO Iain Barnes said.
But with long-dated debt yields' tendency to impact valuations of other assets, from global currencies to stocks, he said investors were nervous that any further volatility in 30-year Treasuries could start rippling across global markets. "Multi-asset investors' primary concern is thinking about how these different asset classes respond to each other," he said, adding that he was keeping his own portfolios broadly diversified and neutral on market risk for now, in line with much of the investment industry.
With the U.S debt pile already at US$36 trillion, President Donald Trump's plans to slash taxes, cut federal budgets and boost military and border enforcement spending has sparked rollercoaster moves in the long-term debt yields that set the nation's borrowing costs.
The 30-year Treasury yield was 4 basis points lower but held just above 5 per cent after hitting a 19-month high in the previous session.
"There is certainly nothing in this market move or the passage of this version of the bill that tells me there is going to be meaningful reduction in US bond issuance or this broader concern about global bond supply," said Ken Crompton, senior interest rate strategist at the National Australia Bank.
Yields on 30-year Japanese bonds, which hit record highs earlier in the week as selling driven by domestic fiscal and inflation concerns was exacerbated by moves in US debt, recovered slightly, declining by 5 bps to around 3.10 per cent . Data on Friday showed Japan's core consumer price inflation climbed 3.5 per cent in April in its steepest annual increase for more than two years, raising pressure on the Bank of Japan to keep hiking interest rates.
In the euro area, German Bund yields dipped on but stayed on track for their fifth straight weekly rise, tracking US Treasuries.
The benchmark European debt has sold off despite money markets showing that traders anticipate the European Central Bank cutting its main deposit rate to about 1.75 per cent by year-end .
DOLLAR DECLINE
In currency markets, the euro firmed 0.5 per cent to US$1.1335 .
An index tracking the US currency against a basket of peers including the euro and Japan's yen, was 0.2 per cent lower and down 1.3 per cent on the week in its first weekly drop since late April.
Despite the euro's gain, which tends to knock exporters' shares, Europe's Stoxx 600 share index gained 0.3 per cent in early dealings and Germany's Xetra Dax added 0.4 per cent, as traders stayed cautious towards US assets.
Japan's Nikkei also gained 0.5 per cent on Friday, with MSCI's broadest index of Asia-Pacific shares outside Japan rising by the same amount.
Bitcoin prices dipped from its record high but it was still set for a weekly gain of 6.4 per cent to US$110,796.
Oil prices dropped for a fourth consecutive session and were set for their first weekly decline in three weeks, weighed down by renewed supply pressure from another possible OPEC+ output hike in July.
Brent futures fell 0.85 per cent to US$63.89 a barrel and US West Texas Intermediate crude futures fell 0.9 per cent to US$60.65.
In precious metals, gold prices rose just over 1 per cent to US$3,321 an ounce.
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