Dollar supported by high yields ahead of Fed meeting

The dollar held firm on Wednesday after the previous day’s surge in U.S. yields resulted in sharp gains against the euro and put the greenback above support levels established in recent months amid mounting expectations for U.S. interest rate increases.

The euro EUR=EBS is back on its 50-day moving average at $1.1327 after falling about 0.7% on Tuesday, its sharpest daily drop in a month, according to Reuters.

The greenback also held sterling GBP=D3 below its 200-day moving average ahead of British inflation figures due later Wednesday, as talk of a leadership challenge to Prime Minister Boris Johnson added uncertainty.

Annual headline inflation in Britain is seen hitting an almost decade-high 5.2% and a surprise could trigger further bets on Bank of England rate hikes and renew the pound’s rally.

The dollar has been boosted by U.S. Treasury yields rising further ahead of next week’s Federal Reserve policy meeting at which traders are starting to fear another hawkish surprise.

Two-year Treasury yields US2YT=RR have leapt 15 basis points over two sessions to cross 1% and benchmark 10-year yields US10YT=RR inched up on Wednesday to touch a new two-year high of 1.9%.