Dollar Index drops, yield curve flattening gathers pace

USD down as treasury yield curve flattens
Sign of risk-off in equities also keeping USD bulls at bay

Omkar Godbole FXStreet Contributor

Dollar Index (DXY) is losing altitude in Asian trade, tracking the flattening of the treasury yield curve and moderate risk aversion in the equity markets.

As of writing, DXY is trading at 94.40; down 0.33 percent on the day.

The offered tone around the USD may have strengthened as the difference or the spread between the US 10-year treasury yield and the 2-year treasury yield continues to narrow. An uptick in the spread is referred to as a steepening of the yield curve and is considered positive for the USD. Meanwhile, falling yield spread means flattening of the yield curve and is considered bearish for the US dollar.

Currently, the spread stands at 75 basis points (bps). A break below the Oct low of 74.8 bps would mean the yield curve is flattest since 2007. A flatter yield curve usually means falling inflation expectations or slowdown in the economic activity.

Meanwhile, 0.30 percent drop in the S&P 500 futures could be hurting the USD as well.

USD Outlook

Kathy Lien from BK Asset Management writes - " After the rate decision, rate hike expectations for December increased from 82.8% to 92.3%. Many sources are also saying that Jerome Powell will be President Trump's pick for Fed Chair. As the market has fully discounted a Yellen departure, as long as Trump picks Powell or Taylor and not someone from left field, the dollar will rise as the uncertainty recedes. The announcement is expected on Thursday along with the Republicans' tax reform bill, which was delayed from today. Unless there are any unexpected surprises on either front, the dollar should rise on these announcements."

Dollar Index Technicals

A break below 94.28 (10-DMA) would expose support at 94.00 (zero figure) and 93.80 (Oct. 18 high). On the other hand, a move above 94.651 (previous day's low) would open up upside towards 94.80 (daily high) and 95.00 (zero levels).

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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