US Dollar: Flatter curve supports currency – ING
ING’s Chris Turner notes that the Dollar is benefiting from a flatter US yield curve as hot inflation data keeps short-dated rates elevated while long-dated Treasuries recover. He argues this backdrop typically favors the Dollar versus activity and emerging market currencies.
ING analyst Chris Turner observes that the US dollar is enjoying a boost from a more level US yield curve. Hot inflation reports are driving short-term interest rates upward, while longer-term Treasury bonds are recovering. This situation generally favors the dollar compared to other currencies and emerging markets. The most significant development this week has been the resurgence of the long end of the US Treasury market, despite persistent inflation data.
Investors appear to see long-term Treasuries as a balanced hedge against a potential correction in the AI sector. Should the tech sell-off intensify, that Treasury buying may shift back to the shorter end of the curve. Inflation data continues to keep short-term interest rates elevated, resulting in a near 20 basis point narrowing in the 2-10 year Treasury curve this week.
In environments where the Fed is easing while growth expectations are being revised downward, the dollar tends to perform well against activity and emerging market currencies. As long as short-term rates do not drop further, the dollar is expected to hold near its recent highs. A significant drop in AI stocks and risk assets in general is needed for the dollar to decline.
For now, it appears the dollar will stay relatively stable. The Swiss franc is likely to outperform the dollar in this context.
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