Storm is coming! The US dollar breaks through the 91 mark, gold falls below 1770, and Trump declares war on McConnell.
On Wednesday, February 17, during the US trading session, US Treasury yields jumped as the market continued to bet on further economic recovery and accelerating inflation. This led to a strong rise in the US dollar index, which briefly surpassed the 91 level. Spot gold, meanwhile, fell over $20, breaking below the $1770 per ounce mark. In other news, former US President Trump issued a statement on Tuesday accusing Senate Republican leader McConnell of being a "political hack" and criticizing his credibility on China issues. Market bets on economic recovery and accelerating inflation lift dollar, push gold lower
Time:
2021-02-18 09:19
On Wednesday, February 17, during the US market trading session, US Treasury yields surged as the market continued to bet on further economic recovery and potentially accelerating inflation. This led to a strong rise in the US dollar index, which briefly surpassed the 91 mark; spot gold, meanwhile, saw a price drop of over $20, falling below the $1770 per ounce level. In other news, former US President Trump released a statement on Tuesday accusing Senate Republican Leader McConnell of being a "political hack" and criticizing his trustworthiness on China-related issues.
Market Bets on Economic Recovery and Accelerating Inflation Lift Dollar, Weigh on Gold
The dollar rose against lower-yielding currencies on Wednesday, hitting a five-month high against the yen, as bets on further economic recovery and potentially accelerating inflation pushed US Treasury yields higher.
The surge in US Treasury yields boosted the dollar, with the 10-year yield rising to 1.333% from around 1.20% at the end of last week.
"Currently, the selling of US Treasuries is the main driver in the foreign exchange market, and the dollar has inevitably received support, rising not only against the yen (USD/JPY has the highest correlation with the US 10-year Treasury yield in foreign exchange), but commodity currencies have actually been hit the hardest," said Francesco Pesole, G10 FX strategist at ING.
"While the bond market is doubling down on reflation bets, other assets aren't showing optimistic risk sentiment. The risk is that the rise in US Treasury yields is too fast, to the point where it begins to undermine itself, leading to a pullback in risk assets."
The yen, which is sensitive to US Treasury yields, reacted most strongly, with USD/JPY jumping to 106.225 in Asian trading, its highest level since September, before retreating to 105.89.
"I think the downward trend for the dollar is over. At the beginning of the year, speculators were betting that USD/JPY would fall below 100. They seem to have abandoned that view now," said Yukio Ishizuki, senior strategist at Daiwa Securities.
The options market clearly shows a reduction in bets on USD/JPY falling. Short-term dollar calls have become more expensive than puts.
Now, the one-week risk reversal spread is supporting a bullish dollar for the first time in nearly five years.
"If anyone thinks US Treasury yields will rise further, the dollar could rise further," said Jun Arachi, senior forex strategist at Rakuten Securities.
"I would say this trade could last until the Biden administration's stimulus package takes effect (likely in March), at which point people may start unwinding their 'sell the fact' bets."
Gold prices fell for a fifth consecutive trading day on Wednesday, hitting a more than two-month low, as bets on economic recovery boosted the dollar and Treasury yields. Investors are also awaiting policy clues from the minutes of the Fed's January meeting.
During the US market trading session, spot gold briefly plunged nearly $20, touching a low of $1773.89 per ounce, before recovering slightly from the low, but then quickly fell again, hitting a new daily low of $1769.60 per ounce.
In a lengthy statement targeting the Republican Senate leader, Trump said: "Mitch is a dour, sullen, and unsmiling political hack, and if Republican Senators are going to continue to support him, they will not win again."
"He will never do what needs to be done, or what is right for our Country," Trump said. "Where necessary and appropriate, I will be supporting primary challengers to those who have supported the policies of 'Make America Great Again' and 'America First.'"
The statement comes three days after Trump was acquitted in an unprecedented second impeachment trial, highlighting the widening rift within the Republican Party over the role the former president should play within the party. Trump retains high approval ratings among Republicans and has previously indicated he will remain actively involved in politics.
Seven Republican senators voted to convict Trump on charges of inciting the January 6th attack on the Capitol, making it the most bipartisan impeachment trial vote in history. However, the conviction vote fell short of the two-thirds needed for conviction.
While McConnell voted "not guilty" in the impeachment trial, he publicly condemned Trump's actions leading up to the Capitol riot. Minutes after the trial concluded, McConnell said on the Senate floor that Trump was "practically and morally responsible for provoking the attack."
McConnell further criticized Trump's "unconscionable" behavior during and after the insurrection in an op-ed published in the Wall Street Journal on Monday night, while defending his vote to acquit Trump.
Trump fired back through his Save America political action committee, saying McConnell's "commitment to business as usual" would lead to further Republican losses.
A spokesperson for McConnell's office did not immediately respond to CNBC's request for comment. But McConnell's former chief of staff Josh Holmes tweeted: "The most interesting part of this Trump letter is that all the reporters who told us Trump was dangerous and should be removed are now tweeting it out along with him once he attacks Republicans."
Trump, who lost to Biden after one term, blamed McConnell for a smaller-than-desired direct payment proposal in a coronavirus relief package that led to Republicans losing control of the Senate.
Trump claimed: "I single-handedly saved at least 12 Senate seats. Then came the Georgia disaster, where we should have won both US Senate seats, but McConnell traded the Democrats' $2000 economic stimulus checks for $600. What happened?"
Additionally, Trump's Tuesday statement accused McConnell of being "untrustworthy on China because his family has massive business holdings in China."
McConnell's wife, Elaine Chao, immigrated to the US from Taiwan at a young age.
She served as Transportation Secretary during Trump's term until January of this year, when she resigned from Trump's cabinet a day after Trump supporters stormed the Capitol.
McConnell's former political opponent Amy McGrath also linked McConnell's wealth to China in campaign ads. The Washington Post called the ad "highly misleading," and McConnell's campaign called it racist.
Trump's statement also claimed that McConnell, who has won reelection every six years since 1990, would have "lost badly" without his support. Trump said providing that support was his "only regret."
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