The previous quarter saw a spike in U.S. Treasury yields and the dollar’s strongest rally in years, on rising expectations that accelerating U.S. economic growth and inflation could force the Fed to abandon its pledge to keep interest rates near zero until 2024.
The International Monetary Fund said on Tuesday that unprecedented public spending to fight the pandemic would push global growth to 6% this year.
But the bond market has stabilised so far this week, with the 10-year U.S. Treasury yield at 1.64%, down from its peak of 1.776% at the end of March.
At 0716 GMT, the dollar was at 92.368 against a basket of currencies, close to a two-week low, having fallen from its recent high of 93.439, which it hit on March 30.
“A large share of the hopes of a U.S. growth boom supported by state aid and rapid vaccination progress has already been priced in,” Commerzbank FX and EM analyst Esther Reichelt wrote in a note to clients.
“Further and more pronounced USD gains would only be justified if this boom also caused rising inflation rates to which the Fed would have to react with higher interest rates.”
Market participants were waiting for the Fed meeting minutes, due to be released later in the session, for hints about the Fed policymakers view on rising yields.
“Investors will be scanning the minutes in search of any ‘discomfort’ among policymakers about rising inflation prospects and in parallel any hint that the discussion is migrating towards defining a timeline for tapering asset purchases,” ING strategists wrote in a note.
“Any (even mild) hawkish signal surely bears the risk of hitting Treasuries, and providing some support to the dollar.”
U.S. money markets are pricing in a 25 basis point hike in December 2022.
Euro-dollar was steady at $1.18705, having strengthened so far in April.
So far in 2021, the euro has been driven by prospects of the economic recovery from COVID-19 in Europe lagging that of the United States and Britain, but the euro has picked up over the past week.
Europe’s benchmark equity index, the STOXX 600, closed at a record high on Tuesday, recovering all of its pandemic-driven losses.
“We recently lowered our forecasts for Eurozone GDP growth this year to 4.3%, from 5% previously. But we do expect a catch-up as the vaccination rollout accelerates, enabling restrictions to be eased,” UBS said in a note.
“The fact that Europe’s STOXX 600 hit a record high on Tuesday suggests that investors are still looking through the continent’s current reopening delays.”
Final euro zone and UK PMIs for March will be published throughout the morning.
The Australian dollar fell against the dollar, down 0.4% at 0.76385, while the New Zealand dollar was down 0.3%, both pausing their upward trajectory of the last two weeks.
The Canadian dollar also fell, hurt by a third wave of the COVID-19 pandemic in the country.
Elsewhere, finance officials from the Group of 20 major economies are poised to back a $650 billion boost in the IMF’s emergency reserves and extend a freeze on debt payments as part of an effort to help developing countries still struggling to combat the COVID-19 pandemic. Reporting by Elizabeth Howcroft; Editing by Kirsten Donovan and Timothy Heritage