Dollar hits one-year high as Treasury yields rise

© Reuters. FILE PHOTO: Banknotes of Euro, Hong Kong dollar, U.S. dollar, Japanese yen, GB pound and Chinese 100 yuan are seen in this picture illustration, in Beijing, China, January 21, 2016. REUTERS/Jason Lee/File Photo

By Saikat Chatterjee and John McCrank

LONDON/NEW YORK (Reuters) - The dollar rose to a one-year high on Tuesday on expectations the U.S. Federal Reserve will announce a tapering of its massive bond-buying program next month, and as concerns over soaring energy prices sent investors to the safe-haven greenback.

Yields on the U.S. two-year Treasury note jumped to their highest level in more than 18 months, as investors sold U.S. debt, reckoning that surging energy prices would fuel inflation and add to pressure on the Fed to take action sooner than had been anticipated. [US/]

"The focus right now is Treasury rates," said Joseph Trevisani, senior analyst at FXStreet.com. "The credit markets are anticipating the taper starting, I think, in November."

Investors will be closely watching U.S. Consumer Price Index data on Wednesday and retail sales data on Friday for further clues as to when the Fed might begin winding down its stimulus.

The dollar index, which measures the greenback against a basket of other major currencies, touched 94.519, its highest since late September 2020.

The spike in U.S. yields prompted investors to dump the Japanese yen versus the dollar, resulting in the second-biggest daily fall in the value of the Japanese currency on Monday.

The dollar held near three-year highs versus the yen, which has fallen 4% versus the greenback in three weeks, on Tuesday as Treasury yields continued to rise.

"The primary driver of the move is the further rise that we've seen in U.S. Treasury yields - so it's a fairly simple story of a widening rates differential ... adding to the attraction of the carry trade," said Ray Attrill, head of foreign exchange strategy at National Australia Bank (OTC:NABZY).

A Deutsche Bank (DE:DBKGn) monthly market sentiment survey this month noted that an overwhelming majority of respondents expect U.S. Treasury yields to rise from current levels.

Oil rose towards $84 a barrel, within sight of a three-year high, as a rebound in global demand after the worst of the COVID-19 pandemic caused price spikes and shortages in other energy sources. Coal has scaled record peaks and gas prices remain four times higher in Europe than at the start of 2021.

The commodity-linked Australian dollar was up 0.07% at $0.73515.

The ZEW indicator of economic sentiment in Germany slipped for the fifth month, the latest in a string of indicators showing supply bottlenecks holding back recovery in Europe's largest economy.

The euro and the British pound were both down 0.14% versus the dollar, at $1.1537 and $1.3577 respectively.

In cryptocurrencies, bitcoin was down 1.41% at $56,676. Ether, the world's second biggest cryptocurrency dropped 1.42% to $3,493.

Graphic: FX performance https://fingfx.thomsonreuters.com/gfx/mkt/gkvlgxwazpb/FX%20performance.JPG

Graphic: Graphic: World FX rates https://graphics.reuters.com/GLOBAL-CURRENCIES-PERFORMANCE/0100301V041/index