A two-decade yield high buys the Dollar Index nothing

In a market devoid of any clear direction, the Dollar Index remains stagnant near 99.50, finding support but failing to break above the crucial 200-day Exponential Moving Average (EMA) near 99.75. This range, spanning 17 pips, has persisted for two weeks, indicating a lack of momentum in either direction. The thirty-year Treasury yield, currently at 5.3% – the highest since June 2007 – should be driving the Dollar higher.

However, this upward movement is mirrored across other global markets, rendering it an inconsequential factor in the Dollar's performance.

The relative strength of currency is contingent on the relative yield of bonds in each country. When yields rise across the board, the impact on any single currency is diminished, as they rise in tandem. This is precisely the scenario unfolding. Japan's 10-year yield sits at a three-decade high, Germany's 30-year yield is at its strongest since 2011, and France's 30-year yield has not reached such levels since 2008.

Similarly, the United Kingdom, Italy, Switzerland, and Canada all exhibit higher yields than their recent averages. This synchronised increase in term premiums across major economies does not provide the Dollar with any relative strength, as the gap for it to outperform its counterparts remains closed.

The Eurozone's dominance in the Dollar Index, at 57.6%, means that a rise in German yields, which are closely tied to the Euro, has a neutralising effect on the Dollar's strength. Furthermore, Japan's large domestic bond market, now yielding more than it has in three decades, presents a compelling reason for capital to flow back into the country, further draining the Dollar of any upward momentum.

When combined with the sterling and Canadian Dollar weights, which are also at higher yield levels, more than 80% of the Dollar Index is being influenced by the same upward trend in yields across the board.

Policy expectations, as reflected in the term structure of interest rates, are moving against the Dollar. Conditional meeting probabilities for the Federal Reserve suggest a 65.4% chance of a hold-off in September and a 52.4% chance in October. This reflects a reluctance to tighten monetary policy, even as yields rise. The market has, however, priced in a significant reduction of rate hikes, with the December hold now at just 33.0%.

The sharp reduction in expected tightening over a short period indicates a deferral of the hiking cycle, rather than an actual easing of policy.

The recent economic data has also provided little support for the Dollar. July housing starts fell short of expectations, pending home sales declined, and industrial production grew at a slower-than-anticipated pace. These indicators highlight a weakening economic outlook, which should typically weigh on a currency. However, the Dollar has been unable to capitalise on these factors, suggesting that the market has already priced in these economic challenges and lacks any further bullish narratives to support a rally.

The Stochastic Relative Strength Index (Stoch RSI) has been hovering near the low end of its range for two consecutive weeks, indicating a lack of buying interest. This suggests that the sellers, who have been active in the market, are not exhausted but are instead patient, waiting for a catalyst to trigger a move. The Federal Open Market Committee's (FOMC) minutes from their July 28-29 meeting, released on Wednesday, added to the uncertainty.

Three reserve bank presidents dissented from a quarter-point increase, and since then, the market has been eroding the gains from that decision, making it a test of the extent of their agreement.

Looking ahead, key economic releases, including initial jobless claims, the Philadelphia Fed manufacturing survey, and the August Purchasing Managers Index (PMI), will provide further insights into the economic health of the United States. These data points, especially the PMI readings due on Friday, could act as a decisive factor for September's pricing.

If the Dollar fails to break above the 200-day EMA near 99.75, it may struggle to find a meaningful upward trajectory in the near term. With resistance at the 200-day EMA, the 100.00 handle, and the declining 50-day EMA near 100.25, the path to bullishness is currently blocked. Conversely, support at 99.50 is the immediate floor, with a break below leading to further declines towards the 98.75 level, marking the end of this downtrend.

The current bias leans bearish, as the Dollar loses its unique yield advantage while global yields rise in lockstep. Validation of a potential upward move would require the daily close to surpass 100.25.