Dollar's best day since June as yields jump: how bond yields move FX

The US dollar ended Friday with its best day since June, according to Investing.com, and was set for a weekly gain. The driver was higher US government bond yields: Investing.com reports that Treasuries fell as blowout payrolls lifted yields across the curve.

Our last lesson covered the payrolls surprise itself, a 165K rise against 65K expected, as investingLive summarised. Later data added to the picture. investingLive reports that November US consumer sentiment came in at 51.0 against 48.0 expected. The ECB reference rates for 6 November show the dollar firmer against most majors, with the Australian dollar hit hardest. For the full market wrap, see our sister site's report on the dollar's best day since June as payrolls lifted Treasury yields.

What is the link between bond yields and currencies?

A bond is a loan to a government or company. The yield is the yearly return an investor earns for holding it. Bond prices and yields move in opposite directions. When investors sell Treasuries, prices fall and yields rise. That is what "Treasuries fall" means in a headline.

Why does this move currencies? Money flows toward places that pay more. If US yields rise, holding US bonds becomes more attractive. To buy them, foreign investors first need dollars. That extra demand can lift the dollar.

Strong jobs data often pushes yields higher because traders expect the central bank to keep interest rates higher for longer. So the chain on Friday ran: strong payrolls, higher Treasury yields, firmer dollar.

A worked example

The ECB publishes one official fixing per business day. These are reference rates, not live quotes. Here are the 5 and 6 November fixings.

EUR/USD: 1.1224 minus 1.1165 equals 0.0059, or 59 pips (a pip is the fourth decimal place). One euro cost fewer dollars, so the dollar gained. Seen from the dollar side, $1 bought 1 ÷ 1.1224 = 0.8910 euros on 5 November and 1 ÷ 1.1165 = 0.8957 euros on 6 November.

AUD/USD: 0.7000 minus 0.6871 equals 0.0129, or 129 pips. That is more than twice the euro's drop.

USD/CAD: here the dollar is the base currency, so a rise means a stronger dollar. 1.4066 minus 1.3966 equals 0.0100, or 100 pips.

USD/JPY: the dollar slipped 0.13 yen, from 158.46 to 158.33. Higher US yields did not lift the dollar against the yen in this fixing. That is a useful reminder: yields are one force among several. Earlier in the week, Investing.com linked yen strength to safe-haven demand during a stock market sell-off.

Note the timing too. A fixing is one snapshot per day, so it may not capture the full reaction to news released later that day.

You can follow the broader dollar on the US Dollar Index chart and the biggest mover on the AUD/USD chart.

Why it matters for new traders

Currency moves often start in the bond market. If you only watch exchange rates, you may miss the reason behind a move. Checking whether yields rose or fell after a data release helps explain why the dollar did what it did.

The link is not automatic. Other news pulls in different directions. On Friday, investingLive reported that Iran responded positively to a mediator proposal, which pressured oil and lifted stocks. Risk appetite, safe-haven flows and commodity prices can all shift currencies at the same time as yields.

Finally, compare the size of moves. A 59-pip fall in EUR/USD and a 129-pip fall in AUD/USD came from the same dollar story. Some currencies react more strongly than others.

Key terms

• Bond: a loan to a government or company that pays interest.
• Yield: the yearly return on a bond. It rises when the bond's price falls.
• Treasuries: bonds issued by the US government.
• Across the curve: yields rising for short-term and long-term bonds alike.
• Reference rate (fixing): an official daily exchange rate, here from the ECB, not a live quote.
• Pip: the fourth decimal place in most pairs, or the second in yen pairs.