The US Dollar's recent performance has left many market observers scratching their heads. Despite the highest long-dated US yields in nearly two decades, the Dollar Index (DXY) has barely budged. In fact, it's moved by a mere three hundredths of a point, hovering just above 99.50 on Tuesday. This lack of movement is intriguing, especially considering the significant yield differential.
What makes this particularly fascinating is the absolute nature of the yield move. Ordinarily, a 5.3% yield on 30-year Treasuries would be a Dollar story, but the move is synchronized across the globe. From Japan to Germany, France, the UK, Italy, and beyond, long-term yields are soaring. This synchronization neutralizes the impact on the Dollar, especially with the Euro's heavy weight in the index.
The Japanese situation is especially noteworthy. With a 13.6% weight in the index, Japan's rising bond yields provide an incentive for overseas capital to return home. Add to that the sterling and Canadian Dollar's long-end yields, and over 80% of the Dollar Index basket is being influenced by this global yield surge.
However, the policy expectations curve is working against the Dollar. Market probabilities suggest a deferral of the hiking cycle, stripping the Dollar of its carry advantage without offering a growth scare to fall back on. Recent economic data releases, including housing starts, pending home sales, and industrial production, have done little to support the Dollar's case.
Additionally, the lack of a haven bid is notable. Typically, a combination of rising long-end yields and deteriorating risk appetite would be Dollar-positive. Yet, the Dollar Index remains stagnant. This suggests that sellers are patient, waiting for a break below the 99.50 support level, which could open the door to further declines.
As we look ahead, the Federal Open Market Committee (FOMC) minutes on Wednesday and the preliminary August PMI readings on Friday are key events. The FOMC minutes will provide insight into the dissenters' views, while the PMI data could influence September pricing. Resistance levels are currently near 99.75 and 100.00, with support at 99.25 and 98.75. A close above 100.25 would invalidate the bearish bias.
In conclusion, the US Dollar's performance is a complex interplay of global yield movements, policy expectations, and market sentiment. While the Dollar may be losing its rate advantage, the synchronized global yield repricing could have broader implications for the currency market. It's a fascinating dynamic, and one that highlights the intricate relationships between economics, policy, and market psychology.
