The dollar improved to a one-week high versus a multitude of major currencies, reinforced by an increase in Treasury yields after a report U.S. President Donald Trump was leaning towards selecting a hawk for the next head of the country’s Federal Reserve.
After the report that President Trump was choosing Stanford economist John Taylor to head the Federal Reserve late on Monday the U.S. 2-year Treasury yields reached their highest in nearly 10 years. Yields remained close to those levels on Tuesday as well.
Taylor is seen as more hawkish than current Chair Janet Yellen as he favors a more ruled approach to monetary policies and would create a quicker pace of tightening possible, enhancing the dollar.
Currency economist Lee Hardman, believes the bank would “not be surprised” to see spike in the dollar between 3 and 5 percent initially if Taylor is chosen.
“A potential shift in strategy towards a more rules-based approach for setting policy would be seen as less supportive for financial markets and increase the likelihood of the Fed raising rates materially more in the coming years than is currently priced in,” Hardman stated.
The dollar index, which measures the greenback against six major currencies, increased on the report by Trump and rose about a quarter of a percent to 93.527 on Tuesday, the greatest in a week.
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Also on Trump’s list is Jerome Powell, Gary Cohn, Yellen and Kevin Warsh. Trump is to meet Yellen on Thursday as part of the pursuit for a new candidate.
The euro dropped 0.3 percent to a one-week low of $1.1755, falling nearly 3 percent since reaching a 2 1/2-year high in September.
“The European Central Bank is now considered less hawkish than the market had initially thought last month, pushing German bund yields lower and in turn favouring the dollar against the euro,” said Junichi Ishikawa, senior forex strategist.
The dollar was flat at 112.16 yen after rising 0.3 percent late Monday, moving away from the three-week low of 111.650.
Sterling was firm at $1.3261.