Dollar hits 4-month high against euro on Federal Reserve's taper talk

The dollar hit a four-month high versus the euro on Tuesday after upbeat U.S. jobs data bolstered expectations that the Federal Reserve could soon start tapering its massive bond-buying programme.

Analysts said the dollar was supported by rising U.S. bond yields, as the prospect of reduced Fed stimulus weakened bond prices. The 10-year Treasury yield rose to as high as 1.336% in London trade, its highest in more than three weeks.

U.S. job openings, a measure of labour demand, hit a record high in June while hiring also increased, the Labor Department said in a monthly survey on Monday.

That followed Friday's non-farm payroll report showing jobs increased by 943,000 in July, above the 870,000 forecast by economists in a Reuters poll.

The dollar index strengthened on Friday and Monday, and reached an 18-day high of 93.102 at 1018 GMT on Tuesday.

At 1054 GMT, it was up 0.1% on the day at 93.034. It hit a four-month high versus the euro, with the euro down 0.1% on the day at $1.17265.

Germany's ZEW survey found investor sentiment deteriorated for a third month in a row in August, due to fears that rising COVID-19 infections could hold back the recovery in Europe's largest economy.

Market participants now turn their focus to U.S. consumer inflation data due on Wednesday, which could provide more cues on the timing of the Fed's bond-purchase taper.

Although there is talk among analysts of the market being "data-driven", U.S. jobs market and inflation statistics are difficult to interpret, Commerzbank Ulrich Leuchtmann wrote in a client note.

"Even if the macro data from the United States is currently astounding, it says little about where the dollar should trade in the medium term."

"And that's why the FX market is wary of any significant reassessments."

Atlanta Federal Reserve Bank President Raphael Bostic, speaking after the jobs data, said he was eyeing the fourth quarter for the start of a bond-purchase taper, but was open to an earlier move.

Boston Federal Reserve Bank President Eric Rosengren said the Fed should announce in September that it will reduce asset purchases in the autumn.

"Market participants will be watching comments from Fed officials even more closely than normal in the near-term for any signs that the Fed could speed up plans for tighter policy," MUFG currency strategist Lee Hardman said in a note to clients.

Elsewhere, risk appetite was hurt by worries about growth in China and the fast-spreading Delta coronavirus variant, which sent oil prices to a three-week low in the previous session. Wall Street futures pointed to a mixed start for U.S. stock indexes. [.N]

The Australian dollar, which is seen as a proxy for risk appetite, has been hurt in recent weeks by lower commodity prices and extended lockdowns in the country.

At 1056 GMT, it was up 0.2% at $0.73395, having spent the last three weeks at levels not seen since December 2020.

The New Zealand dollar was up 0.1% at $0.6994.

"We are still recommending a short AUD/NZD position to benefit from widening policy divergence between the RBA (Reserve Bank of Australia) and RBNZ (Reserve Bank of New Zealand)," MUFG's Hardman wrote.

"The short AUD leg should act as a hedge to offset downside risks to the NZD from global growth concerns."

The Swiss franc and the Japanese yen were both down 0.1% against the dollar, as demand for safe-haven currencies fell.

In cryptocurrencies, bitcoin was trading around $45,383, down 2% on the day, having hit a three-month high of $46,759 overnight.

 

(Reporting by Elizabeth Howcroft; Editing by Ramakrishnan M. and Subhranshu Sahu)