Despite Current Dovish Outlook, Dollar Index Posted 4.4 Percent Annual Gain

Cash market Treasury yields were little changed on Monday, but Treasury futures continued to rise as investors sought protection against future stock market volatility amid concerns over U.S.-China trade relations and uncertainty over the outcome of the partial U.S. government shutdown. Furthermore, investors are still lightening up on the short-side in reaction to the possibility the Fed may pause its plans to raise interest rates in 2019. The Fed is on record saying it may raise rates twice next year, but the market is not pricing in any rate hikes.

In the cash market, the yield on the benchmark 10-year Treasury note finished at 2.686 percent, down 0.052 percent, while the 2-year Treasury yield held at 2.496 percent, down 0.04 percent. The 5-year Treasury yield ended the day at 2.509 percent, down 0.062 percent.

Like the stock market, the highlight of the Treasury market was the heightened volatility. The catalysts for the volatility were tighter monetary policy, fears of an economic slowdown and an ongoing trade dispute between the United States and China.

An aggressive Federal Reserve, which raised rates four times in 2018 and hawkish Fed Chairman Jerome Powell helped drive the 10-year yield to 3.26 percent last year, its highest level in seven years. However, fear of a global economic slowdown helped drive rates back to their lowest levels since May. This is where yields currently stand.

U.S. Dollar

The U.S. Dollar fell to its lowest level against a basket of currencies since November 20 on Monday, putting the index in a position to continue to retreat early in the new year. The index has been under pressure since December 14 when the Fed announced it was reducing the number of potential rate hikes in 2019 from 3 down to 2.

On Monday, the March U.S. Dollar Index settled at 95.735, down 0.230 or -0.24%. Despite Monday’s setback, the greenback was still able to post its best performance in three years.

While most of the recent pressure on the U.S. Dollar has been fueled by falling U.S. Treasury yields, and a dovish outlook for future rate hikes, pressure is also being exerted by persistent tensions in the stock market and increased demand for safe-haven currencies like the Swiss Franc and the Japanese Yen.

Annual Recap

In 2018, the U.S. Dollar Index rose 4.4 percent, its best yearly percentage in three years. The Euro fell nearly 5 percent last year. The British Pound, which has been hammered by concerns over Brexit, lost about 6 percent for the year.