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Rising U.S. Treasury yields are lifting the dollar, emboldening contrarians pushing against consensus forecasts for a prolonged slide by the world’s reserve currency.
The ICE U.S. Dollar Index DXY, +0.36%, which measures the currency against a basket of six major rivals, was up 0.3% at 92.268 on Monday, trading at its highest since Nov. 24, according to FactSet. The gauge is up 1.5% so far in March and 2.6% for the year after slumping to a 22-month low in January.
“The song remains the same, at least in the U.S. with U.S. yields continuing to grind higher and dragging the USD (U.S. dollar) along with it,” wrote Brad Bechtel, global head of currencies at Jefferies, in a Monday note to clients.
The yield on the 10-year Treasury note TMUBMUSD10Y, 1.596% rose around 4 points to trade above 1.60% on Monday. Yields and bond prices move in opposite directions. The move continued a significant backup in yields that has been blamed for a violent rotation out of highflying growth stocks into more cyclical, value-oriented names.
That rotation remained on display Monday, with the Dow Jones Industrial Average DJIA, +1.34% surging more than 600 points, or 2%, at its session high to trade at an intraday record, while the tech-heavy Nasdaq Composite COMP, -1.87% fell 0.6%.
Higher U.S. yields relative to foreign bonds is seen as a fundamental element of support for the dollar because they stoke demand for U.S. assets.
Most analysts, however, have looked for the dollar to remain under pressure after a steep slide last year, arguing that a global economic pickup and the Federal Reserve’s commitment to letting the economy run hot before pulling back on monetary stimulus would see the dollar slide versus major rivals.
Contrarian dollar bulls have argued that the U.S. is poised to outperform other major economies as the global economy recovers, pushing the Fed to pull back on monetary stimulus more quickly than other major central banks.
Expectations for that scenario are beginning to build, said Ben Randol, analyst at Bank of America, in a Monday note.
“A steeper, more proximate path of Fed normalization relative to global central banks is broadly beginning to support the U.S. dollar, our analysis shows. This evidence supports our bullish USD thesis based on fundamental growth and interest rate decoupling this year, particularly as [currency] sensitivity is asymmetrically poised to increase in the months ahead,” he wrote. “We remain contrarian [dollar] bulls and expect this process to continue to play out.”
Dollar bears argued that rising yields were unlikely to be sustained, leaving the currency to drift lower versus major rivals once the global bond market regains equilibrium.
In fact, there’s less than meets the eye when it comes to the attractiveness of U.S. yields and the dollar, argued Steve Barrow, head of G-10 strategy at Standard Bank, in a Monday note. The gains have been “compromised” by rising inflation expectations, which have seen U.S. real, or inflation-adjusted, yields move less than nominal yields, he said.
What’s more, he expects the rise in the nominal 10-year Treasury yield to “blow itself out” in the 2% region. Barrow cited a list of other factors likely to keep the dollar in check, including Fed resistance to altering forecasts for policy rates to remain anchored at current levels for coming years, as well as expectations an overheating U.S. economy will lead to a rapid deterioration in the U.S. trade balance.
For now, dollar bulls may have the upper hand when it comes to the technical picture after the DXY, referring to the ticker for the ICE Dollar Index, posted a weekly close on Friday above its 100-day moving average. That sets up a potential test of the 200-day moving average, which stands at 92.95, Bechtel said.
The euro EURUSD, -0.49%, which carries by far the largest weight in the DXY, fell below its 100-day MA, with support at the 200-day at $1.1825 next in sight for dollar supporters. The euro was down 0.5% at $1.1856 in recent trade.
The 200-day MA “will be HUGE for the model/momentum fund community and I imagine we’ll see a bit of a battle shape up around these levels,” he said. “Unlikely we just punch through and keep going, we’ll see short term [dollar] bull take profits and longer term players defend these levels. Only if we punch through successfully will we really see the tide turn on USD short sentiment.”
