Forex
US dollar’s rally supercharged by soaring real yields on Treasuries
© Reuters. FILE PHOTO: U.S. one dollar banknotes are seen in front of displayed stock graph in this illustration taken, February 8, 2021. REUTERS/Dado Ruvic/Illustration/File Photo
By Saqib Iqbal Ahmed
NEW YORK (Reuters) – Surging U.S. real yields are aiding the dollar’s rebound, rewarding bullish investors while making bears think twice before betting against the buck.
The real yield on U.S. 10-year Treasuries – which measure how much investors stand to make on U.S. government bonds after inflation is stripped out – hit 2.47% on Tuesday, the highest in nearly 15 years, according to data from the U.S. Treasury Department.
That has made betting on the U.S. currency more profitable, since bullish investors can collect yield while sitting on their dollar positions. The dollar is up 7% from its 2023 lows against a basket of currencies and stands at a 10-month high.
At the same time, climbing real yields make it more expensive to bet against the dollar. Bearish investors establishing short positions must pay more to borrow the currency.
Dollar positioning in futures markets showed a net long of $3.07 billion for the week ended Sept. 26, according to data from the Commodity Futures Trading Commission. That was a sharp reversal from a short position of $21.28 billion earlier this year.
“The dollar isn’t just the nicest house in a bad neighborhood right now, it’s the only game in town,” said Karl Schamotta, chief market strategist at Corpay in Toronto. With real yields pushing higher, “only the bravest of traders are willing to bet against the greenback,” he said.
The Federal Reserve’s resolve to keep rates higher for longer along with relatively strong U.S. economic growth has helped push nominal yields to their highest level since 2007. That, combined with a deceleration in inflation, has sent real yields soaring.
Their surge has coalesced with other factors to fuel the dollar’s rebound. The greenback is up 3% against a basket of currencies this year.
Other factors include a resilient economy that has made the U.S. a relatively more attractive investment, with growth steadier than floundering Europe and China. The dollar has also gotten a boost from investors nervous about Wall Street’s decline, with the down 7% from its July high.
While U.S. rates have stayed high with growth resilient, “Europe and China have disappointed,” strategists at UBS Global Wealth Management wrote in a recent note.
“The near-term risks are skewed toward additional US dollar strength, in our view.”
The dollar has tracked real yields in recent years, with peaks and troughs closely aligned.
That has made even bearish investors wary of betting against the U.S. currency.
Aaron Hurd, senior portfolio manager at State Street (NYSE:) Global Advisors, said the dollar is overvalued against a broad range of currencies, including the yen, whose sharp decline this year has put investors on the lookout for intervention from Japan’s policymakers.
Still, high real yields make him hesitant to short the U.S. currency.
“I am not going to pay away 5.5-6% a year in interest to short that,” Hurd said.
“You have one of the highest yielding currencies in developed markets. It’s backed by about the strongest growth in developed markets and it provides a hedge to risky assets. That’s kind of a nirvana,” he added.
For now the dollar remains well positioned, Corpay’s Schamotta said.
“A pivot will come – we think relative economic surprise indices will begin shifting against the dollar within the next two months – but for now, the trend is the dollar bull’s friend,” Corpay’s Schamotta said.
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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