Fed Officials Urge Caution, Dollar Slips

The Vice Chair of the Federal Reserve expressed the need to consider higher bond yields in future interest rate decisions.

The statement by the Fed's top officials triggered a fall in US Treasury bond yields. The greenback also weakened against various other major currencies, so that the US Dollar Index (DXY) fell to the 105.80s - its lowest range in more than a week.

Fed Officials Urge Caution, Dollar Slips

Federal Reserve Vice Chairman Philip Jefferson told the National Association for Business Economics that he would consider higher bond yields in evaluating the policy path forward. He believes the central bank needs to "proceed with caution" in assessing whether interest rate increases need to be raised again amid rising US Treasury bond yields.

Jefferson's statement immediately dampened the bond yield rally. The US Treasury 10Y yield is now circulating at around 4.6720, even though last week it reached its highest level in the 4.8000s.

The decline in yield has a negative impact on the US dollar exchange rate. Additionally, the greenback was weighed down by rumors regarding China's new stimulus plan which is likely to be included in the 2023 APBN.

"With Treasury yields down significantly this morning during cash trading and a more constructive session for European equities, it appears FX traders are feeling more comfortable exiting the dollar," said Simon Harvey, head of FX analysis at Monex Europe, as reported by Reuters, "This is likely supported by news that China will increase its fiscal spending, although we think this only improves sentiment now that the details (of China's stimulus) are unclear."

Market sentiment is also starting to stabilize in the face of the new armed conflict in Palestine. Israel said it had regained control of the Gaza border this morning, after yesterday pounding Gaza city with the fiercest air strikes in the history of its occupation of Palestine.

Market participants will next monitor the release of US producer inflation data tomorrow. There are also speeches from several other Fed officials who are likely to influence the market in the short term, including Raphael Bostic, Christopher Waller, Neel Kashkari and Mary Daly.