After Moody’s last week downgraded its U.S. debt ratings, investor attention this week has honed in on the country’s $36 trillion debt pile and U.S. President Donald Trump’s tax bill that could add trillions of dollars more to it.
Dubbed by Trump as a “big, beautiful bill”, it narrowly passed Republican-controlled U.S. House of Representatives and now heads to the Senate for what is likely to be weeks of debate.
The dollar index, which compares the U.S. currency against six other units, including the yen and euro, is set for 1.1% decline this week though it was little changed at 99.829 in early Asia trade.
That’s despite a steep selloff in U.S. Treasuries at the start of the week. The 30-year bond yield stayed above 5% in Asian hours on Friday, hovering near 19 month highs. It is close to October 2023’s high of 5.179%, a break past which would take it to its highest since mid-2007.
The elevated yield hasn’t underpinned the dollar as investors flee U.S. assets in a “Sell America” move similar to last month. “What has become quite stark this week is the reaction function in broad markets to the rise in U.S. long-end Treasury yields,” said Chris Weston, head of research at Pepperstone. Weston said higher yields are not being driven by improved growth dynamics, but by concerns of increasing fiscal recklessness, deficit spending and the perception of higher interest expenses.
“Add in the toxic mix of higher inflation expectations … and the net effect has been a strong rise in ‘term premium’ and the would-be foreign buyers simply staying out of the market.”
The euro strengthened 0.21% to $1.1303 in early trading and is set for a 1.2% gain for the week.
The yen was steady at 143.84 per dollar, also on course for a 1.2% rise for the week, after Japan’s core inflation accelerated at its fastest annual pace in more than two years in April, raising the odds of another interest rate hike by year-end.
The data underscores the quandary facing the Bank of Japan which must grapple with price pressures from persistent food inflation as well as economic headwinds from Trump’s tariffs.
Super-long Japanese government bonds have also scaled record highs this week, although they were steady on Friday. [JP/]
“Japan’s inflation unsurprisingly was again reported to be firm. This might augment the turbulence in JGBs in the long end,” said Krishna Bhimavarapu, APAC economist at State Street Global Advisor.
The Swiss franc was slightly stronger at 0.8272 per dollar, also set for a 1.2% rise for the week after two weeks of losses.
Elsewhere, the Australian dollar, often seen as a proxy for risk appetite, is set to end the week and month broadly flat against the greenback. The Aussie last fetched $0.6422.
Australia’s central bank on Tuesday cut its cash rate to a two-year low of 3.85%, citing a darker global outlook and cooling inflation at home.
New Zealand dollar was 0.2% stronger at $0.59095, set for a small rise for the week.
