The US Dollar (USD) has strengthened significantly against major currencies, including the Canadian Dollar (CAD) and British Pound (GBP), as US Treasury yields surged to their highest levels in nearly two decades. On Thursday, the USD/CAD pair climbed above 1.4100 for the first time in two months, nearing late July highs in the 1.4130 area, marking the Canadian Dollar's fourth consecutive day of losses against the Greenback [1]. Meanwhile, the GBP/USD fell by 0.12% to near 1.3225 during European trading, with the British Pound under continued pressure [2].
The rally in US Treasury yields is a key driver of these currency moves. The 10-year US Treasury yield crossed its 2023 peak to reach 5.09% according to Societe Generale strategists, while in European trade, it posted a fresh 19-year high at 5.15% [1][2]. The US Dollar Index (DXY) rose 0.15% to near 101.32, its highest level in eight weeks [2]. The heat map of currency movements shows the USD gaining 0.09% against the CAD and 0.10% against the GBP on the day [2].
Market sentiment is being shaped by expectations of further Federal Reserve (Fed) rate hikes. The CME FedWatch tool indicates an almost 55% probability that the Fed will raise rates at both remaining policy meetings this year [2]. Fed board members, including Williams, have maintained a focus on the inflation challenge, with Williams stating it is "reasonable to see another rate hike by end of year" and highlighting the US economy's "remarkable resilience" and strong demand from AI [2]. Societe Generale strategists noted that the recent PMI data, which showed US business activity growing at its fastest pace in over five years, accelerated the leap in yields and may have triggered stop-loss orders [1].
Despite a significant recovery in Brent Oil prices to the $100 level, which would typically support the CAD, the impact was offset by risk aversion and higher US yields [1]. Looking ahead, markets are awaiting Canada's July Retail Sales data, expected to show a 0.8% decline, and US Initial Jobless Claims for further signals on labor market strength [1]. Additionally, speeches from Philadelphia Fed President Anna Paulson and Cleveland Fed President Beth Hammack are anticipated to provide more insight into the Fed's policy outlook [1].
CONCLUSION
Surging US Treasury yields and heightened expectations of further Fed rate hikes have propelled the US Dollar to multi-month highs against both the Canadian Dollar and British Pound. Despite supportive factors like rebounding oil prices for the CAD, risk aversion and strong US economic data are keeping the Greenback in the lead. Market participants remain focused on upcoming economic releases and Fed commentary for further direction.