The dollar has failed to weaken as much as might be suggested by the decline in US bond yields versus international peers, in large part because haven flows into the greenback are helping to prop it up.
(Bloomberg) — The dollar has failed to weaken as much as might be suggested by the decline in US bond yields versus international peers, in large part because haven flows into the greenback are helping to prop it up.
That’s the view of Standard Chartered’s Steve Englander who points to the fact that the five-year Treasury yield is now at its tightest level in more than a year when compared to the weighted average of similar-maturity yields for the various currencies that make up the Bloomberg dollar index.
“A week ago, the USD was still responding to risk appetite and spreads, in line with the prior three months,” the bank’s head of research for global Group-of-10 currencies wrote in a note to clients. “Now, the USD does not seem to be responding much to the compression in spreads.”
The yield on the benchmark five-year Treasury dropped for a fourth-straight day Wednesday and has fallen 31 basis points over that timeframe to 3.37%. The equivalent German rate has slipped by just 23 basis points over the same period, while the yield on similar-tenor Australian instruments is down less than 11 and rates on Japanese instruments are up 6.
The Bloomberg Dollar Spot Index, meanwhile is, down less than 0.2% since March 30. That is, of course, an extension of a longer move down —it’s down 2.7% since March 7 — but in Englander’s view less than the yield-gap change would warrant if that were the key driver.
“We suspect that increasing concern about where the USD is positioned on the ‘dollar smile’ curve is diluting the impact of the USD’s much-reduced yield advantage,” Englander wrote, referring to a theory that says the US currency tends to strengthen when the American economy is either very strong or weak, but declines when growth is middling. “The fear is that deteriorating growth and financial instability will lead to safe-haven USD demand, offsetting any yield moves.”
Wednesday’s market moves underscore some of the shifting dynamics between the US currency and rates. While Treasury yields fell across the curve after worse-than-expected readings on the US labor market and services, the Bloomberg dollar gauge notched its biggest gain since March 24.
Jobs Report Impact
Looking ahead to the key US jobs report this Friday, Englander reckons that the most negative payrolls scenario for the greenback is if the number of jobs increases by around 50,000 to 100,000 versus the previous period. Such a number would be well below the median forecast of economists — currently around 235,000 based on a Bloomberg survey — “but not so low that fears of economic freefall begin to emerge,” according to Englander.
A minor uptick in the unemployment rate to 3.7% from 3.6% would be the most USD-negative outcome, in Englander’s view, while anything higher than 3.9% would “suggest a quickly approaching recession” and give the greenback another leg up.
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