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US Dollar Fundamental Outlook: All Eyes on Treasury Yields as Stocks Wobble

US Dollar Fundamental Outlook: All Eyes on Treasury Yields as Stocks Wobble

Daniel Dubrovsky, Strategist

US Dollar Fundamental Forecast: Bullish

  • US Dollar sees its best week against major peers in months
  • Rising Treasury yields unnerving stocks, will this continue?
  • Eyes on US non-farm payrolls report at the end of the week
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Against an average of its major counterparts, the Euro, British Pound, Australian Dollar and Japanese Yen, the US Dollar experienced its best week in about 4 months. The haven-linked Greenback capitalized on a couple of trends in financial markets that may leave it in a position to benefit from again in the next. These are a combination of reflationary expectations and rising longer-dated Treasury yields.

According to Bloomberg, about 218.9 million vaccine doses have been administered globally. In the US, about 67.8 million doses have been given out. Meanwhile, President Joe Biden is inching closer to passing a US$ 1.9 trillion Covid-relief package. A potentially larger infrastructure package is in the works to follow-up on the Covid-related aid. This has in turn boosted local growth and inflation prospects in the medium-term.

As a result, longer-dated Treasury yields have been rising as investors begin to price in an unwinding of loose monetary policy in the long run, perhaps coming sooner-than-expected. Meanwhile, returns in government debt on the front-end remain suppressed by current quantitative easing measures to keep the economy supported. Fed Chair Jerome Powell didn’t seem concerned about rising rates at testimony this past week.

Rising yields in Treasuries make it relatively more expensive to invest in the stock market, because the ‘risk-free’ rate is becoming slowly more competitive. Given what has been perceived as stretched equity valuations, it isn’t too surprising to see a healthy correction in equities. It remains to be seen if this defensive mood will hold in the near-term, but the US Dollar could continue benefiting here.

Ahead, the US will release its latest non-farm payrolls report. According to the Citi Economic Surprise Index, data out of the world’s largest economy has been tending to outperform as of late. A better-than-expected result could amplify some of the moves seen in Treasuries, with a particular focus on average hourly earnings. Check out the DailyFX Economic Calendar for updates on these outcomes.

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US Dollar Versus Treasury Yields and Risk Appetite

US Dollar vs. Treasury Yields vs. Risk Appetite

Chart Created in TradingView

--- Written by Daniel Dubrovsky, Strategist for DailyFX.com

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.

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