US Dollar: Carry support persists on high yields – MUFG

MUFG’s Lloyd Chan notes that elevated US yields and increased expectations of further Federal Reserve (Fed) tightening are supporting the US Dollar (USD) in the near term. The 2-year and 10-year yields remain high, and markets are pricing a higher probability of Fed action by year-end. This backdrop underpins a carry-driven bid for the Dollar, with US Dollar Index (DXY) holding above 99.00 as US data stay supportive.

High US yields back Dollar strength

"The 4-week average of initial jobless claims stayed low at around 202.5k as of mid-May, while the S&P Global US composite PMI steadied at 51.7 in May, remaining in expansion territory."

"That said, US yields stay elevated. The 2-year is holding above 4%, while the 10-year has risen by nearly 20bps to around 4.57% month-to-date. Markets have also shifted towards pricing a higher probability of Fed tightening by year-end."

"This yield backdrop continues to underpin a carry-driven bid for the USD, with DXY firming above the 99.00 level. US macro data also remains supportive of the dollar. "

"Talks between the US and Iran remain ongoing, with Iran’s uranium stockpile and control over the Strait of Hormuz emerging as key sticking points. Iran appears to be insisting on retaining its uranium stockpile domestically, while also proposing a toll system for transit through the Hormuz strait."

"Nonetheless, tentative optimism around a potential agreement has supported risk sentiment, with the S&P 500 closing higher and Brent crude edging lower."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)