By Peter Nurse
Investing.com - The U.S. dollar climbed in early European trade Tuesday after a hefty rate hike by Australia’s central bank prompted further inflation concerns, causing U.S. bond yields to soar.
At 2:50 AM ET (0650 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 102.623.
The Reserve Bank of Australia raised its key rate by 50 basis points earlier Tuesday, a more hawkish move than the 25 basis point increase that most had expected, while also committing to doing "what is necessary" to cool inflation.
AUD/USD climbed as high as 0.7243, before handing back most of the gains to stand 0.1% higher at 0.7199.
The fact the Australian policymakers felt the need to increase interest rates by a hefty half a percentage point has caused nerves to fray ahead of Friday’s U.S. consumer price figures, especially after the strong U.S. jobs data at the end of last week.
The May CPI release will provide more clues on the Fed's rate-hiking path, ahead of next week's policy decision, and concerns are growing that upward price pressures will be around for longer, potentially forcing more aggressive action from the Fed.
The 10-year U.S. Treasury yield was last seen trading at 3.047%, at levels seen for the first time in nearly four weeks.
This resulted in USD/JPY soaring 0.6% to 132.69, climbing to a fresh two-decade high, with the yield differentials weighing heavily on the yen as the equivalent Japanese yields are pinned near zero.
EUR/USD fell 0.1% to 1.0688 after German factory orders fell 2.7% on the month in April, suggesting the Eurozone’s largest economy looks set for at least one quarter of economic contraction.
That said, the main focus is on Thursday's meeting by the European Central Bank, which is expected to prepare the ground for an interest rate hike at its July meeting.
“Markets are attaching a close-to-zero probability of a rate hike, which would be in contrast with recent ECB communication indicating July as the start of the tightening cycle,” said analysts at ING, in a note.
GBP/USD fell 0.5% to 1.2469 after U.K. Prime Minister Boris Johnson survived a vote of no-confidence overnight but was left severely weakened.
Even without the political turmoil, “the pound remains vulnerable in the short term given worsening growth prospects and a potential re-pricing of BoE rate expectations,” said ING. “A break below 1.2500 in cable could see the pair extend losses to the 1.2300-1.2350 area this week.”