The dollar index rallied to three-month highs on Thursday after Fed Chair Jerome Powell indicated no concerns about the recent surge in 10-year U.S. Treasury yields as he pursues far-off goals of maximum employment and 2% inflation.
Powell said he would only become concerned about rising bond yields if they were part of a disorderly move or persistent tightening of financial conditions nS0N2JQ018.
Markets interpreted these comments as a sign that Treasury yields would be allowed to rise in line with the expectation of faster economic growth as pandemic restraints recede and fiscal stimulus bridges the demand gap.
EUR/USD fell toward this year's lows and USD/JPY neared 8-month highs as 10-year Treasury yields surged from 1.47% before Powell's appearance to about 1.55% while the yield curve bear steepened.
That left EUR/USD threatening the weekly kijun and this year's low at 1.1975/52 after failing to close above the weekly tenkan at 1.2150 in rebound attempts during the last three weeks and on course to close below the 100-day and 21-week moving averages at 1.2033/30.
The hefty $21bln IMM net EUR/USD spec short remains a weight on EUR/USD, which appears to be in a precarious position.
EU COVID vaccinations lag the U.S. and euro zone retail spending unexpectedly plunged in January nL5N2L22ZH, while U.S. spending surged due to fiscal stimulus nL1N2KW1HE.
Meanwhile, the ECB has expressed concern about rising yields nL5N2L15MW.
The dollar index burst above its pivotal 100-DMA and was close to confirming that the pandemic downtrend has reversed, following a pattern very similar to 2017-18 nL2N2L21ON.
The breakout target on such a reversal is 3.5% above current levels.
USD/JPY accelerated its recent rally, clearing the 50% Fibo of the pandemic downtrend at 107.16 and notching its biggest percent gain in two months.
Dollar shorts have been squeezed as 10-year Treasury-JGB yield spreads surged 90bp from August to pre-pandemic levels by 1.4%.
USD/JPY's next target is the 61.8% Fibo of the pandemic downtrend at 108.23.
So far, heavily overbought daily studies have failed to reverse the advance, which has now claimed key weekly hurdles as well nL2N2L21FK.
Sterling succumbed to the dollar's yield-driven advance, but losses were limited by demand near the 21-day moving average at 1.3910.
The 0.3% drop in EUR/GBP showed the pound still retaining some dominance tied to faster UK vaccinations despite post-Brexit friction over Northern Ireland nL5N2L21OD.
AUD/USD and other high-beta currencies' early gains evaporated after Powell.
Even a 5% rise in oil prices after OPEC+ mostly stuck to their production cuts for another month couldn't bail out commodity currencies, particularly with copper leading a slide in metals prices.
The focus Friday will be on the U.S. monthly employment report.
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