“The strong increase in U.S. real yields is helping the dollar bounce back, delighting bullish investors and making those who were thinking of betting against the dollar reconsider.
The real yield on U.S. 10-year Treasuries, which indicates the potential earnings on U.S. government bonds after accounting for inflation, reached 2.47% on Tuesday. This is the highest it’s been in almost 15 years, according to data from the U.S. Treasury Department.”
“This has made investing in the U.S. dollar more appealing because optimistic investors can earn returns while holding onto their dollar investments. The dollar has risen by 7% from its lowest point in 2023 against a range of currencies and is now at its highest level in 10 months.
However, increasing real yields make it costlier to bet against the dollar. Pessimistic investors who want to take short positions have to pay more to borrow the currency.”
According to data from the Commodity Futures Trading Commission, dollar bets on futures markets showed a net positive position of $3.07 billion during the week ending on September 26. This marked a significant shift from a negative position of $21.28 billion earlier this year.
Karl Schamotta, chief market strategist at Corpay in Toronto, commented, ‘The dollar isn’t just the best option in a tough situation right now; it’s the only viable choice.’ As real yields continue to rise, he added, ‘Only the most daring traders are willing to wager against the U.S. dollar.'”
“The Federal Reserve’s determination to maintain higher interest rates for an extended period, coupled with the comparatively robust performance of the U.S. economy, has driven nominal yields to their highest point since 2007. This surge in yields has been further amplified by a slowdown in inflation, resulting in a substantial increase in real yields.
Several factors have contributed to the resurgence of the U.S. dollar. It has gained 3% against a basket of currencies this year. One key factor is the resilient U.S. economy, making it a more attractive destination for investments compared to struggling regions like Europe and China. Additionally, concerns about the decline in Wall Street’s performance, with the S&P 500 down 7% from its peak in July, have prompted investors to seek refuge in the dollar.
As U.S. interest rates remain elevated and economic growth stays strong, ‘Europe and China have been disappointing,’ noted strategists at UBS Global Wealth Management in a recent statement.”
“We believe that, in the near term, there’s a higher likelihood of the U.S. dollar gaining more strength.”
In recent times, the U.S. dollar has closely followed real yields, moving in sync with their peaks and valleys. This correlation has made even bearish investors think twice before betting against the U.S. currency.
According to Aaron Hurd, senior portfolio manager at State Street Global Advisors, the U.S. dollar is currently overvalued compared to various currencies, including the yen.
The yen’s significant decline this year has raised concerns about potential intervention by Japan’s policymakers. However, the high real yields make Hurd reluctant to short the U.S. dollar, saying, “I am not going to pay away 5.5-6% a year in interest to short that.”
Hurd emphasized the strengths of the U.S. dollar, stating, “You have one of the highest yielding currencies in developed markets. It’s backed by about the strongest growth in developed markets and it provides a hedge to risky assets. That’s kind of a nirvana.”
According to Karl Schamotta, chief market strategist at Corpay, the U.S. dollar’s current position is strong, and he believes that a shift might occur in the future. He anticipates that relative economic surprise indices will turn against the dollar within the next two months. However, for the time being, the trend is favorable for the U.S. dollar.
