The Dollar Index Surges to a 10-Month High; Yen and Euro Struggle

On Wednesday, the US dollar reached a 10-month peak, causing the euro to drop to its lowest level in almost nine months and keeping the yen in a zone that raises concerns about intervention. Investors are placing their bets on the belief that the US economy will perform better with higher interest rates compared to its competitors.

Although US Treasuries stabilized following a recent significant sell-off, yields remained close to their highest levels in 16 years, providing strong support for the US dollar.

The continued strength of the US economy has defied investor expectations of a slowdown, and the Federal Reserve issued a warning last week that it may raise interest rates once more and is likely to maintain higher rates for a longer period.

Marc Chandler, the Chief Market Strategist at Bannockburn Global Forex in New York, commented, "The US is best equipped to deal with these new challenges - higher interest rates and rising energy prices. Even if the news from the US isn't that great, it still appears relatively better."

The US Dollar Index, which measures the dollar's performance against a basket of major currencies, reached 106.72, its highest level since November 30.

The euro declined to $1.0, its lowest level since January 6, while the British pound dropped to $1.212, the lowest since March 17.

Dane Cekov, Senior FX Strategist at Nordea, noted, "It's now evident that markets anticipate higher long-term US yields for an extended period. That's the primary driver for the dollar's strength."

Federal Reserve Bank of Minneapolis President Neel Kashkari stated on Wednesday that it remains unclear whether the central bank has completed its rate hikes, given ample evidence of ongoing economic strength.

Yen Under Watch for Intervention

Elevated US yields have created difficulties for the yen, which slipped to an 11-month low of 149.4 per dollar.

The dollar/yen pair is highly sensitive to changes in long-term US Treasury yields, especially at the 10-year maturity.

The yen's decline towards the psychological level of 150 per dollar has put traders on high alert for any signs of intervention by Japanese authorities, as officials intensify their rhetoric against the falling currency.

Alvin Tan, Head of Asia FX Strategy at RBC Capital Markets, commented, "The fundamental upward pressure on dollar/yen due to bond yields is too significant to ignore. However, even if there were intervention, it wouldn't permanently push the dollar/yen down unless bond yields also started to retreat significantly."

Minutes from the Bank of Japan's July meeting, released on Wednesday, revealed that policymakers agreed on the need to maintain extremely loose monetary policies but were divided on when the central bank could end its negative interest rate stance.