The bond market sell-off is helping the dollar

The bond market sell-off is contributing to the dollar's strength. Experts initially believed the dollar would weaken at the end of 2025, but the opposite has happened. The DXY index, measuring the dollar's value against other major currencies, has risen by 4% in 2026 and reached its highest level since Donald Trump's trade war began in April 2024.

Several factors have aided this trend, including strong performance of American stocks and investors' disinterest in the euro. Euro's value has decreased from $1.17 to $1.12 due to concerns about political and fiscal stability in the Eurozone. French ten-year government bond yields have risen from 3.5% to 4.8%, now standing above the German equivalent by 1.3-1.4 percentage points.

Investors have also shifted their focus to the U.S. dollar as an alternative after dumping euros. Additionally, rising energy prices, primarily driven by the U.S. war with Iran, have strengthened the dollar. Although high oil prices typically weaken a country's currency, the U.S. is now a net energy exporter thanks to its shale-fracking boom.

The American economy has also been outperforming expectations, with GDP growth consistently surpassing forecasts. Strong household consumption, business investment in artificial intelligence infrastructure, and a potential annualized economic expansion above 3% contribute to the dollar's strength. However, the sources of dollar strength are narrower than before.

Historically, the dollar rallied when both the U.S. economy and the global economy were performing well, creating a "dollar smile." But now, the dollar's appeal as a safe haven is less prominent compared to the allure of American risk assets. Should these assets underperform, foreign investors might quickly sell them, causing the dollar to experience significant fluctuations.