Safe Havens: Dollar Rises Against Euro on Faltering European Economic Reports
Another sizable jump in Treasury prices rekindled the global demand for safety, prompting a spike in the dollar against the euro due to faltering economic reports out of Europe.
Investors unloaded Treasuries and piled into safe-haven assets after the release of European economic data, which triggered fears of a recession. This caused the euro to drop to its lowest level in 20 years against the dollar.
The US 10-year yield traded slightly higher at around 2.90%, having earlier surged almost 10 basis points, following lower revisions to French manufacturing figures that sent the euro area's borrowing costs tumbling. German two-year rates - which are the most sensitive to changes in monetary policy - fell as much as 14 basis points to 0.47%.
As European Central Bank rate hike bets dropped in money markets, the euro fell to its weakest level since December 2002. The Fed's further-than-expected increase of interest rates helped drive the currency down 1.4%.
After the release of data on economic growth and inflation, traders will make their decisions about whether to increase or decrease their bets on a further interest rate hike. The data that will be released next week will play an important role in this decision.
"As inflation continues to rise, bonds remain in a difficult situation," said Su-Lin Ong, senior economist and head of fixed-income strategy for Royal Bank of Canada in Sydney. "The question is: How high will it go? And how sticky will it be into 2023?"
In the early part of the session, short-term Treasury bonds led a selloff following a holiday on Monday, with risk appetite rebounding on hopes that the US will soon roll back some tariffs on Chinese consumer goods. The two-year rate exceeded that on five-year notes in the first inversion since February 2020 in that part of the curve, underscoring concerns that Fed will continue to raise rates aggressively despite the risk of a recession.