Stronger US rates fuel dollar rally

The greenback continued to extend gains on Wednesday amid an upside shift in the US Treasury curve. Since the beginning of the week, the buck appreciated against all major currencies, with EM currencies taking the biggest hit. The Mexican pesos tumbled more 1.90% as USD/MXN rose to 18.95, while the South African rand gave up 2.6%, with USD/ZAR rising to 12.45.

EM currencies were not the only one to suffer from this basic shift, as G10 currencies have not emerged unscathed. The New Zealand Dollar took the biggest hit, as investors continued to unwind long bullish bets, and slid another 0.50% this morning. The Japanese yes also went under heavy selling pressure as USD/JPY climbed back above the 109 threshold.

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Several factors can explain the rapid appreciation of the US dollar over the last few days. Obviously, the surge in interest rates has made long dollar trade more appealing – the 10-year Treasury yield broke the 3% mark, while the 2-year one hit 2.5% as inflation expectations kept improving – but the ongoing sell-off in the equity market has also helped to deteriorate the overall risk sentiment, which benefits the dollar.