This week, the US Dollar Index (DXY) strengthened significantly. Major factors were rising Treasury yields and an yen's decline. The 10-year Treasury yield rose by 7 basis points to 3.963%, while the 2-year yield increased to 4.001%. This surge followed a weaker-than-average bond auction. The recovery in yields came after a weak U.S. jobs report, which initially spiked safe-haven demand. Investors quickly shifted back to riskier assets, boosting Treasury yields.
The DXY moved away from its seven-month low of 102.15, hitting 103.13. This increase was partly driven by comments from the Bank of Japan’s (BOJ) Deputy Governor Uchida. His remarks on maintaining monetary easing caused the yen to drop by 2.5% to 147.94 per dollar. This decline in the yen provided support for the dollar, which had struggled against other major currencies earlier in the week.
The BOJ’s recent actions, including an unexpected interest rate hike, initially caused market turbulence. Investors unwound carry trades involving the yen, increasing market volatility. However, Uchida's reassurances of maintaining monetary easing helped stabilize the situation. This stabilization allowed global stocks to regain some positive momentum. Additionally, the yen’s decline led to gains in carry trade currencies such as the Mexican peso, New Zealand dollar, and Australian dollar.
The euro eased 0.1% to $1.0923, down from an eight-month high of $1.101. Sterling edged up 0.1% to $1.2704. Traders adjusted their expectations for Federal Reserve rate cuts after an unexpected rise in the U.S. unemployment rate. Markets initially priced in over 125 basis points of cuts for the year but have since moderated to 100 basis points, with a 62% chance of a 50 basis point cut in September.
Given current trends, the US Dollar Index is likely to maintain a bullish outlook in the short term. The stabilization of Treasury yields and the yen’s decline suggest continued investor confidence in the dollar. However, traders should remain cautious as new economic data or shifts in BOJ or Fed policy could introduce further volatility.
The US Dollar Index (DXY) is in a downtrend, but the current two-day rally has been impressive. The market could face resistance at 103.480, which is 50% of the break from 104.799 to 102.160. Since the trend is down, sellers are likely to appear at this level, potentially leading to a retest of 102.764. Overtaking 103.480 would be a sign of strength, potentially triggering a rally to 104.145 and 104.238.
Rising Treasury yields and an yen's decline drive the US Dollar Index higher, providing a bullish outlook amid global economic uncertainties.
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