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US Dollar Forecast: Stuck Between Treasuries, Equities as Emerging Markets Push On

US Dollar Forecast: Stuck Between Treasuries, Equities as Emerging Markets Push On

Daniel Dubrovsky, Strategist

US Dollar, Singapore Dollar, New Taiwan Dollar, Philippine Peso, Indian Rupee, ASEAN, Fundamental Analysis – Talking Points

  • US Dollar held ground as higher Treasury rates offset risk appetite pressure
  • Fiscal stimulus delay, Fed may cool Greenback versus SGD, TWD, PHP, INR
  • APAC, ASEAN data: Taiwanese and Philippine GDP, Chinese industrial profits
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US Dollar ASEAN Weekly Recap

Last week, the haven-linked US Dollar cautiously weakened against its ASEAN counterparts, such as the Singapore Dollar and New Taiwan Dollar. It also saw some weakness against the Indian Rupee, but losses were modest. All things considered, it could have been worse for the anti-risk Greenback considering another solid week for Emerging Market indices as the EEM hit record highs – see chart below.

Notable standouts were the Indonesian Rupiah and Philippine Peso. USD/IDR gained as the Bank of Indonesia left benchmark lending rates unchanged, signaling the intent to keep borrowing costs low until there are signs that inflation is rising. Policymakers also reiterated their stance on maintaining stability in the exchange rate. USD/PHP was little changed as 3-month implied volatility plunged to the lowest in over 20 years.

US Dollar, Emerging Markets Index – Last Week’s Performance

US Dollar, Emerging Markets Index Last Week's Performance

*ASEAN-Based US Dollar Index averages USD/SGD, USD/IDR, USD/TWD and USD/PHP

External Event Risk – US Fiscal Bets, Treasury Yields, Earnings Season, Federal Reserve

ASEAN and Emerging Market currencies can be quite sensitive to general risk appetite, especially against the US Dollar in today’s low-interest-rate environment. What may be keeping the USD from falling more aggressively is the story of Treasury yields ever since Democrats took control of both chambers in the legislative branch. That increased prospects of more aggressive fiscal stimulus.

As a result, longer-dated government bond yields rallied, offering the US Dollar some appeal. In fact, Treasury yields even outpaced government bond rates from ASEAN countries earlier this month. So while market mood has broadly remained upbeat, the Greenback has notably slowed its descent as of late. My ASEAN-based USD index is now more closely following Treasury yields – see next chart below.

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Might this change over the remainder of the week? Prospects that another Covid relief fiscal package may not arrive before the middle of March sank Treasury yields to start off the week. Equities also recovered after this announcement, perhaps enjoying what has been a rather rosy fourth-quarter earnings season. Still, all eyes are on key tech reports from Apple, Microsoft and Facebook. More of the same may keep investors upbeat.

Keep a close eye on the FOMC monetary policy announcement. While lending rates are expected to remain unchanged on Wednesday, markets will likely focus on commentary about the US$120 billion in monthly asset purchases. Last week, the central bank’s balance sheet climbed to its highest yet, around US$7.42 trillion. With tapering likely being some ways off, the Greenback may remain under pressure.

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ASEAN, South Asia Event Risk – Taiwanese and Philippine GDP, Chinese Industrial Profits, Singaporean Unemployment

Focusing on the ASEAN economic docket, Taiwanese fourth-quarter advanced GDP estimates are due on Friday. Upbeat local industrial production for December helped boost TWD to start off the week as output grew 9.9% y/y versus 6.0% expected. A rosy GDP print may follow, further pressuring USD/TWD lower. The Philippine Peso will be eyeing GDP data as well.

On Thursday, Philippine growth is expected to shrink -8.2% y/y in Q4. That would mark a fourth consecutive contraction, with 2020 annual GDP expected to drop -9.5% y/y. The latter would be one of the worst readings among its ASEAN counterparts. While USD/PHP remains much lower than last year, declines have notably slowed. This is as the benchmark PSEi index remains well below its peak from early 2018.

Last week, better-than-expected Chinese fourth-quarter GDP helped push the EEM to new highs amid robust output from the world’s second-largest economy. On Wednesday, China will report December industrial profits which may follow a similar rosy path. For ASEAN members, China is a key trading partner and upbeat economic data may continue reverberating outwards. USD/SGD is eyeing Singaporean unemployment data.

Check out the DailyFX Economic Calendar for ASEAN and global data updates!

On January 26th, the 20-day rolling correlation coefficient between my ASEAN-based US Dollar index and an average of 10-year and 30-year Treasury yields increased to +0.54 from +0.17 one week ago. Values closer to +1 indicate an increasingly positive relationship, though it is important to recognize that correlation does not imply causation.

ASEAN-Based USD Index Versus MSCI Emerging Markets Index and Treasuries – Daily Chart

ASEAN-Based USD Index Versus MSCI Emerging Markets Index and Treasuries Daily Chart

Chart Created Using TradingView

*ASEAN-Based US Dollar Index averages USD/SGD, USD/IDR, USD/TWD and USD/PHP

-- Written by Daniel Dubrovsky, Currency Analyst for

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.