Dollar breaks out to 3 month high as bond yields continue to rise

Though the 3% mark for the benchmark US 10-year Treasury yield is hardly a magic number, markets and investors are certainly treating it as such. Tuesday saw the yield poke slightly above 3% to a new multi-year high, exacerbating concerns in the equity markets that rising inflation and interest rates will ultimately weigh on companies and their stock prices. This helped cause a sharp plunge in the major equity indices. Wednesday saw the 10-year yield extend its climb significantly above 3%, which further pressured markets despite a continued slate of positive earnings results from major companies.

As for the dollar, rising yields and interest rate expectations have tentatively helped boost the US dollar index to a new three-month high on Wednesday (peaking at a 91.24 high as of this writing), pushing through key prior resistance around the 91.00 level. At least for the time being, the dollar index breakout has left behind the extended trading range near multi-year lows that has been in place since mid-January. Driven by this recent dollar strength, major currency pairs, including EUR/USD and USD/JPY, have also made robust moves. USD/JPY broke out with a sharp surge on Tuesday above the key 108.00 prior resistance level, which extended further on Wednesday, while EUR/USD has followed through on a breakdown below a major uptrend line that has been in place for over a year. Thursday brings the European Central Bank’s highly anticipated policy decision, which could possibly weigh on the euro even more, potentially providing a further boost to the dollar.

From a technical perspective, the yield-driven rise and breakout of the dollar index has potentially opened a path for further dollar appreciation, especially if the benchmark 10-year yield continues to ascend above 3%. Any continued dollar rebound and rally could then boost the dollar index towards further upside resistance levels around 91.80 (the 50% retracement level of the last bearish run) and the 92.50 area (the 62% retracement of the same bearish run and a key historic turning point for the index).