The last several months has not been good for the United States dollar. It has been broadly weakened by a number of headlines which include still tepid inflation, lack of fiscal policy direction from the current presidential administration, the slowness for the House and Senate Republicans (GOP) to pass tax reform and unclear directional signals for interest rates hikes from the Federal Reserve Board.
Over the past week, the dollar has inched higher from a three year low in the U.S. dollar index, which measures the almighty buck against a basket of six currencies. This happened on Friday as the dollar was headed for its largest weekly loss in nice months. There is a great deal of negative sentiment which is negating the support the dollar would normally get from higher Treasury yields.
The U.S. dollar has been pressured this year by a number of factors, mentioned above, including Washington’s seemingly pursuit of a weaker currency. Remarks by Treasury Secretary Steve Mnuchin have also added to traders’ worries. These remarks are taken as a perceived erosion of the dollar’s yield advantage in the currency markets. Especially as other countries start to wind down their own easy monetary policies.
The confidence amongst dollar traders has been weakened as worries gain traction over the State’s current account and budget deficits. The budget deficit is expected to expand by $1 trillion in 2019 thanks to an increase in Federal spending and large corporate tax cuts thanks to the recent tax reforms.
Oddly enough, the weakness of the greenback has come despite higher Treasury yields. They have hit four year highs thanks to better than expected inflation numbers. Inflation is strengthening the case for the Federal Reserve to continue increasing interest rates this year. They are expected, currently, to raise rates fur times this year.
Normally, higher Treasury rates strengthen the U.S. currency.
At last glance, at the close of Friday, the benchmark 10 year Treasury note fell a tad and is back below 2.9 percent. On Friday, the U.S. dollar index rose 0.58 percent to close at 89.10. Against the euro, the dollar fell 0.74 percent to close at 1.2414. This is below the three year high at $1.25.
Derek Halpenny, the head of markets research at the MUFG in London, in a Reuters article, said that
Treasury yields had been driven higher not by expectations for stronger growth, but by fears about fiscal instability and inflation spiraling out of control. This was the reason an inverse correlation was emerging between the dollar and long term Treasury yields.
The worry (over) Trump’s policy direction has longer-term risk implications that I think could become a ‘triple-sell‘ on assets, with equities, bonds and currency sold off [and] where you enter this phase of a loss of confidence in dollar related assets and policymaking
The U.S. dollar index was on the road to fall 1.8 percent for the week. This would have been the dollar index’s largest loss since May 2017.