Oct 11, 2023

The EURUSD pair has rallied from March lows and will look to build on support.

Dollar Index: Weekly Chart

The dollar index topped last week with an extreme run in bonds and may have seen the best of its interest rate-led gains. The weekly level stopped the buck around $106.50, and this week is showing weakness.

Normally, the US dollar is a safe haven in times of war, especially when the two current conflicts are in the Middle East and near Eastern Europe.

China’s yuan has seen some small slowdowns this week, and Hong Kong has been a notable recipient. It could be that the United States’s dire fiscal position is turning investors away. With a surge in yields last week, it could mean that investors see a top.

It may be that the greenback extended too far on recent rate hike fears, and US officials have begun talking of a pause.

“Higher term premiums result in higher term interest rates for the same setting of the fed funds rate, all else equal. Thus, if term premiums rise, they could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening,” said FOMC member Lorie Logan.

The market will get to see the latest FOMC meeting minutes tomorrow, and that could also add to the stock rally, with today’s market up 0.52% for the S&P 500. Investors may find better currency opportunities in the likes of the Japanese yen or Australian dollar, as they are far from the recent turmoil and not dumping money into multiple wars.

The US Treasury 10-year yield has dropped to 4.64% from 4.88% this week after comments from Logan and another Fed official who said the yield spike did the Fed’s job.

“At the heart of that drop in yields has been commentary from two Fed officials yesterday,” says Chris Turner, FX research head at ING Bank. “The market is starting to think that the central bank does take greater notice of bond yields after all”.

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