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Financial markets

US Dollar Plunges to Postwar Low as Fed Intervention Fails to Stem Market Volatility

Strategic Insights

— 1 min read

The US dollar plummeted to a postwar low against the Japanese yen, only to be rescued by the Federal Reserve's intervention, which managed to stem the decline but not entirely reverse it. The dollar's weakness had far-reaching consequences, with US government bonds experiencing their second consecutive day of losses as inflation concerns intensified. Treasury Secretary Lloyd Bentsen confirmed that the US intervened in foreign exchange markets to counter disorderly conditions and pledged to continue to cooperate if necessary.

Key Takeaways:

  • The US dollar fell to a postwar low of 100.55 yen, before Fed intervention reversed the decline, leaving it at 101.48 yen by the end of the day.
  • The decline was not limited to the yen, as the dollar also skidded against major European currencies, including the German mark, Swiss franc, French franc, Canadian dollar, and Italian lira.
  • US government bonds suffered their second consecutive day of losses, with the benchmark 30-year bond yield reaching 7.31%, the highest since April 20.
  • The bond market's weakness can be attributed to the weak dollar, rising commodity prices, and inflation concerns, which erode the value of bonds.
  • Treasury Secretary Lloyd Bentsen confirmed that the US intervened in foreign exchange markets and pledged to continue to cooperate if necessary.
  • The Commodity Research Bureau's price index rose to 224.9, the highest since April 7, indicating rising inflation.
  • Investors expect the Fed to continue raising interest rates, with the next hike expected next month, which could further impact Treasury yields and affect rates for housing and auto loans.

Statistics:

  • The US dollar fell to a postwar low of 100.55 yen, before Fed intervention.
  • The benchmark 30-year bond yield reached 7.31% as of 3 p.m. EDT.
  • Bond yields rose 16 basis points on the day to 7.26%, for a two-day rise of 21 basis points, the largest since yields climbed 30 basis points on April 1 and April 4.
  • The Commodity Research Bureau's price index rose to 224.9, the highest since April 7.
  • The US economy grew at an annual rate of 2.6% during the first quarter, less than half the 7-per-cent rate of last year's fourth quarter.

Sources:

  • Reuters
  • Bloomberg NEW YORK
  • U.S. Treasury Secretary Lloyd Bentsen
  • William Shea, head trader at Nikko Securities Co. International
  • US Federal Reserve Board
  • U.S. Commerce Department

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