US dollar surges as US short-term yields hit 22-month highs
Matt Weller, CFA, CMT January 3, 2022 12:30 PM
It’s clear that investors are more confident than ever that the Federal Reserve will seek to “normalize” monetary policy in 2022, paving the way for US dollar strength
As traders trickle back to their desks to start another year, there’s one market move dwarfing all others: The US dollar is trouncing its major rivals. The chart below highlights the move, with the so-called commodity dollars (the Canadian, New Zealand, and Australian dollar) bearing the brunt of the selling (for more on USD/CAD, see my colleague Joe Perry’s Currency Pair of the Week article):
So what’s driving the big move in the greenback?
As always, one of the strongest cross-market correlations is between short-term interest rates and currencies. As the chart below shows, the 2-year US Treasury yield is trading up 5bps already today to its highest level since the start of the pandemic 22 months ago:
Source: Tradingview, StoneX
While we haven’t necessarily gotten any new “news” on the outlook for interest rates, it’s clear that investors are more confident than ever that the Federal Reserve will seek to “normalize” monetary policy in 2022. As a reminder, the median Fed voter has indicated that he/she expects 3 interest rate hikes this year, and two-thirds (12/18) of members anticipate at least that many rate increases.
On that note, the economic calendar will be ramping up throughout the next couple of weeks, with both traders and policymakers keen for the latest ISM surveys (Manufacturing tomorrow and Services on Thursday), readings on the labor market (ADP on Wednesday and NFP on Friday), inflation figures (CPI next Wednesday and PPI next Thursday), and retail sales (next Friday) out of the US.
Technical view: US Dollar Index (DXY)
The widely-followed US dollar index has spent the last seven weeks consolidating in a sideways range between roughly 95.50 and 97.00. After drifting down to the bottom of that range in low-liquidity holiday trade last week, buyers have stepped in aggressively to defend support near 95.50 to start this week; the rising 50-day EMA also comes in around that area, creating a confluence of support levels within the longer-term uptrend.
Source: Tradingview, StoneX
Looking ahead, continued rising yields could take the US dollar index back to its 18-month highs near 97.00, with a breakout above that level opening the door for more strength through the first half of the year. Meanwhile, only a breakdown from the recent range and the rising trend line near 95.00 would erase the medium-term bullish outlook for the US dollar index.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.