The bond chart shows why, perhaps, we got the Dollar spike in September

Outlook

Today we get the final services and composite PMI. The ISM services index is expected to dip to 51.7 from 52.0.

We can’t explain the dollar pushback yesterday unless it was just traders paring short positions. We can’t find anything in the sentiment or data department. What we did find is an ever-lower cost of hedging the dollar combined with a big inflow into US equities.

Reuters reports in the week to Oct 1, “Investors bought a net $36.41 billion worth of U.S. equity funds during the week in their largest weekly net purchase since November 13, 2024, LSEG Lipper data showed… The large-cap funds segment stood out as it drew a net of $40.75 billion in weekly inflows, the largest amount since at least 2022.”

Even more went into money market funds. At the same time, flow continued into private fixed income but “ditched a net $1.58 billion worth of bond funds, halting their 23-week-long trend of net purchases. They divested U.S. short-to-intermediate government and treasury funds of a net $9.37 billion in their largest weekly sales since at least January 2022.”

We hardly ever get this kind of data, so it’s welcome. The bond chart shows why, perhaps, we got the dollar spike in September.

Bloomberg points out that “Sales of investment-grade reverse yankee bonds — that is euro-denominated debt sold by US companies with relatively strong balance sheets — is rising. As Hans Mikkelsen, long-time credit strategist at Bank of America and now at TD Securities, points out, issuance has jumped from $1.45 billion in August to $7.3 billion last month. There’s some seasonality at play here, but September sales this year also eclipsed the $3.95 billion from the same month last year.

“Conversely, issuance of dollar-denominated debt from non-US companies seems to be under pressure. Sales of “yankee” debt, as it’s known, did rise from $4.9 billion in August to $17.8 billion in September. But that’s far below the $22.9 billion number reported for the same month last year.”

On the same front, the IMF’s new data in the “Currency Composition of Official Foreign Exchange Reserves” shows the dollar losing status. The dollar share of total reserves

fell to 56.3% in Q2, the lowest since 1994, from 57.8% in Q1. See the WolfStreet chart.

Nobody else even comes close to 50%, but diversification of reserves into other currencies is definitely on-going. And we have been here before. See the second chart and note 1991. We remember a flurry of books at the time calling for the demise of the dollar (in part on trade deficits). Most analysts expect this trend to persist. Whether it reverses again depends on whether/how we survive Trump. 

Forecast

Fridays usually see traders squaring up against any Event that might come along over the weekend. That may mean more dollar-dumping. This weekend, aside from whatever tyrannical outrage Trump delivers, the event is the LDP party election in Japan for a new leader who will be prime minister if the party wins the next election. The son of former PM Koizumi is in the lead but challenged by a woman (gasp).

As the entries in the Outlook demonstrate, the dollar is in the doghouse. It’s hard to find a reason for it to thrive—except the robust economy. Assuming we don’t get fresh government inflation data next week but just a bunch of estimates from regional feds and other sources, yields can keep on the lowish side and sentiment dominated by those two rate cuts. A dollar resurgence surprise is not in the cards.

Tidbit: Deprived of our Payrolls data today, we are jonesing for data. The WSJ and Bloomberg offer private sector alternatives, including the new one. 

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