US Dollar Outlook - The Ongoing Battle For Yield Control

US Dollar Price, News, and Analysis

  • FOMC eye rising US Treasury yields.
  • Battle between the bond vigilantes and the Fed continues.

The latest FOMC meeting gave Fed chair Jerome Powell the platform to reiterate the central banks ongoing support for the economy, despite nascent signs of economic growth and a pick-up in inflation. The Fed is expected to keep interest rates at their current level through 2023, or at least until unemployment steadies below 5%.

The bond market, however, is pushing back at the Fed, forcing up longer-dated US Treasury yields – increasing the government’s borrowing costs – as these ‘bond vigilantes’ sell their bonds on fears that inflation will rise sooner than expected as the economy expands sharply.

While the short-end of the US Treasury market is anchored around 15 basis points, the yield on the US 10-year – the closely watched benchmark – has risen over 80 basis points this year to 1.73%, the highest level since January 2020, two months before the pandemic hit. These rising yields, and the steepening 2-10 yield curve, will underpin the US dollar going forward and keep pressure on the Fed to rein in its spending plans and curb inflation fears.

US 10-Year Treasury Daily Yield Chart

10 Year Treasury Chart

Chart via Investing.com

The US dollar is also getting an uplift Friday, after the Federal Reserve declined to extend the relaxation of the supplementary leverage ratio (SLR). This ruling meant that banks were able to exclude their US Treasuries and deposits from their reserve requirements, easing the pressure on banks when the pandemic hit and customer deposits rose. The fear is that with this ruling now ending, that banks may now be additional sellers of US Treasuries, driving the yields even higher.

The US dollar basket (DXY) continues its recent reverse higher and is now breaking above the 200-day simple moving average. A conclusive break and open of this indicator could push DXY back to and even above the March 9 high at 92.53, leaving the dollar at its highest level since late-November. Above here, two swing highs at 94.31 and 94.79 come into view.

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