Weak Finish Suggests U.S. Dollar Decoupling from Rising Treasury Yields

While the benchmark 10-year Treasury yield hit its highest level since 2011 on Friday, the U.S. Dollar Index was struggling. Perhaps this indicates a decoupling by the dollar and Treasury yields. If the run up in Treasury yields begins to level off then we can expect to see a weaker U.S. Dollar this week.
James Hyerczyk
US Dollar 5

Rapidly rising U.S. Treasury yields, a hawkish Fed Chairman and solid economic data was all it took to drive the U.S. Dollar higher against a basket of currencies last week. Even with a slight setback on Friday, the greenback still managed to post its best close since August 20. Nonetheless, with the U.S. November elections drawing closer, one has to wonder if last week’s spike to the upside represented the end of the road for this leg of the rally.

For the week, December U.S. Dollar Index futures settled at 95.305, up 0.568 or +0.60%.

A pair of better-than-expected U.S. economic reports started the ball rolling for the dollar on Wednesday. The ADP Non-Farm Employment Change showed the private sector added 230K jobs in September. This was higher than the 185K forecast. Shortly thereafter, ISM Non-Manufacturing PMI came in at 61.6, trouncing the 58.0 estimate.

However, it was hawkish comments from U.S. Federal Reserve Chairman Jerome Powell that spiked both Treasury yields and the U.S. Dollar Index higher. Powell suggested a hawkish scenario for interest rates when he said the central bank has a way to go yet before it gets interest rates to where they are neither restrictive nor accommodative. In its last monetary policy statement in September, the Fed said it would likely raise rates in December, three times in 2019 and once in 2020.

The December U.S. Dollar Index reached its high for the week on Thursday. On Friday, it posted an inside move while closing lower. Traders blamed the mixed U.S. Nonfarm Payrolls report for the weakness. While the unemployment rate reached nearly a 50 year low at 3.7%, job creation fell to its lowest level in a year. Additionally, year-over-year average hourly earnings, indicated that fears of inflation heating up may have been overblown.

While the benchmark 10-year Treasury yield hit its highest level since 2011 on Friday, the U.S. Dollar Index was struggling. Perhaps this indicates a decoupling by the dollar and Treasury yields.

If the run up in Treasury yields begins to level off then we can expect to see a weaker U.S. Dollar this week.

Australian and New Zealand Dollars

The Australian and New Zealand Dollars were hammered last week. The reason for the spike to the downside is the widening yield spread. Essentially let’s just say it is the divergence in the monetary policies between the hawkish U.S. Federal Reserve and the dovish Reserve Banks of Australia and New Zealand.

The Fed last month raised its benchmark interest rate for the third time this year by a quarter of a percentage point to 2.25 percent. Last week’s comments from Fed Chair Powell strongly indicated the central bank will get more aggressive with future rate hikes if necessary to cool a potentially overheating economy. Currently, the market is pricing in a December rate hike, but the Fed has also flagged three more in 2019 and once more in 2020.

Meanwhile, two weeks ago, the Reserve Bank of New Zealand left its benchmark rate unchanged with no plan for a rate hike. Weak business confidence data even suggests the next major move by the RBNZ will be a rate cut.

Last week, the Reserve Bank of Australia kept its official cash rate on hold at its record low of 1.5 percent. The cash rate last moved in August 2016, and there has not been an official cash rate increase since November 2010.

Currently, the yield spread on the 10-year U.S. and Australian government bonds was now “at the most negative it’s been since 1983”.

Don't miss a thing!

Discover what's moving the markets. Sign up for a daily update delivered to your inbox

Latest Articles

See All

Expand Your Knowledge

See All

Top Promotions

Top Brokers

The content provided on the website includes general news and publications, our personal analysis and opinions, and contents provided by third parties, which are intended for educational and research purposes only. It does not constitute, and should not be read as, any recommendation or advice to take any action whatsoever, including to make any investment or buy any product. When making any financial decision, you should perform your own due diligence checks, apply your own discretion and consult your competent advisors. The content of the website is not personally directed to you, and we does not take into account your financial situation or needs.The information contained in this website is not necessarily provided in real-time nor is it necessarily accurate. Prices provided herein may be provided by market makers and not by exchanges.Any trading or other financial decision you make shall be at your full responsibility, and you must not rely on any information provided through the website. FX Empire does not provide any warranty regarding any of the information contained in the website, and shall bear no responsibility for any trading losses you might incur as a result of using any information contained in the website.The website may include advertisements and other promotional contents, and FX Empire may receive compensation from third parties in connection with the content. FX Empire does not endorse any third party or recommends using any third party's services, and does not assume responsibility for your use of any such third party's website or services.FX Empire and its employees, officers, subsidiaries and associates, are not liable nor shall they be held liable for any loss or damage resulting from your use of the website or reliance on the information provided on this website.
This website includes information about cryptocurrencies, contracts for difference (CFDs) and other financial instruments, and about brokers, exchanges and other entities trading in such instruments. Both cryptocurrencies and CFDs are complex instruments and come with a high risk of losing money. You should carefully consider whether you understand how these instruments work and whether you can afford to take the high risk of losing your money.FX Empire encourages you to perform your own research before making any investment decision, and to avoid investing in any financial instrument which you do not fully understand how it works and what are the risks involved.