Currencies: Dollar index drops to multiweek lows after U.S. bond yields tumble

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The U.S. dollar extended losses on Thursday, taking a particularly hard hit against the British pound, euro and Aussie dollar after a sharp fall in U.S. Treasury yields.

Still, trading appeared thin as many investors were expected to stay away until after the New Year holiday, in what has been a shortened week of trade for many major markets.

Where are currencies trading?

The ICE U.S. Dollar Index DXY, -0.38% , a measure of the dollar against a basket of six major rivals, was down 0.4% to 92.676. The WSJ Dollar Index BUXX, -0.43% which gauges the buck against 16 rivals, was down 0.3% at 86.32.

Both indexes have been down in seven of the last eight sessions, and both are nearing levels not seen in more than a month.

The euro EURUSD, +0.4879%  rose to $1.1928 from $1.1896 late Wednesday in New York, putting it near levels not seen since late November.

The British pound GBPUSD, +0.3806% jumped to $1.3433, compared with $1.3400 Wednesday.

Against the Japanese yen USDJPY, -0.52% the dollar fell to ¥112.81 from ¥113.25 in the prior session.

As for the Mexico-U.S. pair USDMXN, -0.1209% one dollar bought 19.695 pesos compared with 19.7019 on Wednesday, while Canada’s dollar USDCAD, -0.3872%  strengthened against the greenback, with the dollar changing hands at C$1.2616 versus C$1.2644 on Wednesday.

What’s driving the market?

Falling U.S. bond yields were cited as one reason for dollar weakness on Thursday. Falling yields are generally bearish for the home currency and on Wednesday, the yield for the benchmark 10-year Treasury note TMUBMUSD10Y, +0.86%  saw its biggest one-day drop in more than three months.

That marked a reversal from last week when investors shed bonds on fears the rapid passage of the Republican tax bill could trigger a sudden rise in inflation and force the Federal Reserve into more aggressive rate increases in 2018. That scenario would be bearish for bonds and bullish for the dollar. But analysts now believe that selloff was overdone and have been piling back into bonds.

Expectations for higher interest rates from the Federal Reserve have failed to give the dollar a lift, and the ICE U.S. Dollar Index is down 9.3% with a few days left to go in 2017.

The euro, up 13% against the dollar year-to-date, could move even higher against the greenback as the European Central Bank is expected to take its foot off the pedal of quantitative easing in 2018. Higher interest rates in Europe could drive investors back to the euro as they seek yield.

Read: 4 reasons Wall Street banks have the hots for Europe in 2018

What are strategists saying?

“I think the best explanation for the dollar weakness is the sharp fall in U.S. Treasury yields. 10-year bond yields dropped 7 basis points on Wednesday, to reverse almost 50% of the gains from mid-December toward last week, where yields broke above 2.5% for the first time since March 2017,” said Hussein Sayed, chief market strategist at FXTM, in a note to clients.

“Commodity currencies are also enjoying a decent upside, after copper prices rallied to their highest level in almost four years. Oil prices remained close to a 2½ year high, and gold hit a one-month high. Considering that no Tier One economic reports will be released, the Aussie, Kiwi and Loonie will continue to follow commodity prices’ direction,” said Sayed.

What data are ahead?

Weekly jobless claims and advance trade in goods for November are due at 8:30 a.m. Eastern Time. At 9:45 a.m. Eastern, the Chicago purchasing managers index for December will be released.