Normura on why the US dollar is rallying on 'bad' factors -- and why the bounce is unlikely to last

  • The US dollar index (DXY) has surged 2.7% since the start of last week, extending its rally from mid-February to 3.4%.
  • Higher US bond yields have helped to underpin its rally, something Nomura says has been driven by “bad” factors.
  • Nomura doesn’t expect the DXY bounce will last long.

The US dollar index (DXY) has surged over the past week, jumping 2.7% to trade the highest level since mid-January.

At 91.26, it’s now rallied 3.4% since hitting a multi-year low of 88.25 on February 16.

DXY Daily Chart

While the market, in the end, determines its overall value, Bilal Hafeez, FX Strategist at Normura, thinks the recent lift in US government bond yields, helping to underpin the greenback’s rally, has largely been driven by “bad” factors rather than good.

“A better explanation for the jump in yields is perhaps the surge in commodity prices seen over April. Much of this has been driven by trade tensions and geopolitical worries, rather than global demand,” he says.

“The commodity price dynamics seem to have finally spilled over into rates markets last week as yield curves have started to steepen. If anything this suggests rates markets are expecting the Fed to be forced into more hikes to curb these inflationary pressures.”

Hafeez says this suggests the dollar is rallying on “bad” rather than good news, something he says is backed up by the performance of other asset classes over the past week or so.

This interpretation is further buttressed by the fact that US risk markets such as equities and credit have weakened over the same period while the dollar has rallied,” he says.

“Even strong US corporate earnings haven’t been enough to help stocks, instead higher US yields could be de-rating stocks, and investor equity longs and fears on tech hardware seem to be weighing on stocks.”

Hafeez believes the negative tailwinds for the dollar may continue for several weeks. However, he doesn’t expect the current bounce will mark the start of a longer rally in the greenback.

“It doesn’t suggest a turn in the medium-term dollar downtrend,” he says.

In the interim, Hafeez says those looking to add or initiate fresh US dollar shorts should consider selling it against the yen.

“In such an environment, we think the best way of holding onto a core short dollar position would be to sell it against the yen — a safe-haven currency,” he says.

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