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

The statement from a top official at The Fed triggers a fall in US Treasury bond yields. The greenback also weakens against other major currencies, causing the US Dollar Index (DXY) to drop to the 105.80 range - its lowest level over the past week.

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Federal Reserve Vice Chair Philip Jefferson told the National Association for Business Economics that he would consider higher bond yields when evaluating the future policy path. He argued that the central bank needs to "proceed with caution" in assessing whether further interest rate hikes are necessary amid rising US Treasury bond yields.

Jefferson's statement immediately dampened the bond yield rally. The yield on the US Treasury 10-year note is now trading around 4.6720, whereas last week, it had reached its highest level in the 4.8000 range.

The decline in yields harms the US dollar exchange rate. Additionally, the greenback is weighed down by rumors of China's potential new stimulus plan that may be included in the 2023 budget.

"With Treasury yields significantly dropping this morning during cash trading and translating into a more constructive session for European equities, it seems as if FX traders are more comfortable in rotating out of the dollar," said Simon Harvey, head of FX analysis at Monex Europe.

"This has likely been supported by news that China is set to increase its fiscal spending, although we think this is merely improving sentiment at the moment as the details are fairly opaque."

Market sentiment is also stabilizing in the face of the new armed conflict in Palestine. Israel claimed to have regained control of the Gaza border earlier this morning after launching the most intense airstrikes on the city of Gaza in its history of occupation in Palestine.

After this, market participants will watch for the release of US producer inflation data tomorrow. Additionally, speeches from several other Federal Reserve officials, including Raphael Bostic, Christopher Waller, Neel Kashkari, and Mary Daly, will likely influence the markets in the short term.