The Dollar Rally Is A Small Jump Before A Long Downfall
FxPro Financial Services Ltd | Feb 05, 2021 07:13AM ET
The strengthening of the dollar is taking its cue from the optimism around economic recovery, which is reflected by the steepest yield curve we have seen in 5 years.
While the Fed is slashing the near-term yields to rock-bottom, Treasury yields with a maturity of more than three years are rising rapidly. In the current situation, this indicates impending higher inflation rates.
There are two explanations for these forecasts. The first is that the expectation of stronger economic growth would allow the US Federal Reserve to normalise rates in the longer term by winding down its emergency support programs.
The second explanation for market dynamics is not so optimistic. The rise at the longer end of the curve is explained by both higher inflation expectations and a perceived increase in government bonds' supply, which is undermining their price. Yields on 30-year Treasuries have risen to 1.92% and are almost back to pre-crisis levels of 2%. 10-year are yielding 1.31% versus 1.56% a year earlier and have come a long way from 0.5% last July.
Higher yields are attracting buyers of long-term US government bonds, creating a pull in the dollar. However, it is also worth looking at the situation from a different angle: Higher yields mean lower prices for these bonds. In other words, the balance has already shifted towards sellers.
The nature of the stimulus measures and multi-year lows for many commodities last year make the most likely scenario the beginning of a new commodity supercycle, during which the dollar sagged in the 2000s, mid-1930s and early 1960s.
This suggests that the current dollar recovery may be a small jump before a long downfall.
The FxPro Analyst Team
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.