When short-dated U.S. Treasury yields edging higher - five-year bond yields rose to a February 2020 high - investors think that policymakers in the U.S. will be forced to raise interest rates sooner than later.
The rise in short-dated yields has narrowed the spread between 30 year U.S. Treasury yields and 2 year debt to its narrowest levels in a year.
The dollar index firmed 1% to 95.27, its highest level since July 2020, against a basket of its rivals. The dollar's push higher this week has seen it break above a two-month trading range with analysts predicting more gains.
We don't think this is the end of the move and expect the U.S. dollar to remain strong in the first half of 2022 as the Fed's taper coming to a conclusion and a rising rate increase will offer support for the dollar in this period, said Mizuho strategists.
The rise in price pressures pushed inflation-adjusted 30 year U.S. yields to near its lowest levels on record, BOFA strategists said in a weekly note.
The renewed strength of the dollar has given traders a new life in the moribund currency volatility markets as traders decided to buy options to protect themselves against further dollar strength. A currency volatility index hit a new 6 month high.
The Fed said last month that price pressures will be transitory and called into question the Fed's contention that policymakers would lift interest rates sooner than previously thought.
Markets expect a first rate increase by July and a high likelihood of another by November. The rate increase is a 50% chance of a rate increase by then compared to less than 30% a month earlier.
The euro reached a 16 month low at $1.1436, and the sterling reached $1.3354, its weakest level this year.
The European Central Bank is unlikely to change its extremely dovish policy setting in the near term against a slowing economy, as investors are increasingly bearish on the outlook for the single currency.
The economic surprise index for the U.S. went up over its European counterparts as it signaled more gains for the U.S. dollar against the euro.
The risk-sensitive Australian dollar dropped as low as $0.7277 for the first time in more than a month, while in cryptocurrencies, it traded just south of $65,000, down from a record $69,000 earlier in the week.