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By xemarketanalysis April 25, 2018 12:09 pm
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    XE Market Analysis: US Dollar Gains as Emerging Market Currencies Suffer from Rising Yields


    • US 10-year Treasury above 3% for first time since 2014.
    • USD gaining on a key break higher for US government bond yields.
    • EUR remains soft as focus turns to relative interest rate differential.
    • Turkish central bank raises rates, supports the Lira for now.
    • Emerging market currencies weaken on fears of impact from higher debt costs.


    The dollar index, which measures the currency's performance against a basket of major currencies, is at a four-month high, driven by a rise in the benchmark US 10-year Treasury yield above 3%. The rise in the yield (or return) on US government bonds has shifted the focus back onto interest rate differentials, which hugely favors the US Dollar over the Euro and the Japanese Yen in particular where interest rates are at zero. 


    The US Dollar is strengthening across the board today (see highlight). 


    The Pound is slightly weaker versus a stronger US Dollar, but is holding its ground against nearly all other currencies. Market pricing for a May rate hike has edged back over 50% and with investors focused squarely on rising yields, this is benefitting the Pound. 


    The Euro remains close to a 6-week low and is towards the lower end of its limited trading band seen so far this year. Markets await the ECB meeting tomorrow to gauge whether Mario Draghi and his colleagues feel confident enough about the outlook for inflation to end their bond-buying program. 


    Higher oil prices are doing little to support the Canadian Dollar that is down almost 0.5% today and close to its lows for April. As is the case elsewhere, the outlook for interest rates is weighing on the Loonie after BoC Governor Poloz's comments last week. 


    The Australian Dollar has slumped to a fresh 4-month low after annual inflation cooled as expected to 1.9% in the first quarter, and rose just 0.4% from the previous four months. That leaves CPI beginning a third year below the central bank's target, cementing expectations any hike in interest rates is a long distance off.


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