US Dollar: Carry support persists on high yields – MUFG

FXStreet Insights Team FXStreet

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.)

Author

FXStreet Insights Team

FXStreet

The FXStreet Insights Team is a group of journalists that handpicks selected market observations published by renowned experts. The content includes notes by commercial as well as additional insights by internal and external analysts.

AUD/USD remains depressed 0.7000, awaits FOMC Minutes

AUD/USD struggles to capitalize on its recent recovery move and trades with a negative bias below 0.7000 in Wednesday's Asian session. Amid geopolitical uncertainty, the US Dollar attracts some dip-buyers after a fresh leg up in US bond yields, keeping the pair under pressure despite hawkish RBA expectations. All eyes now remain on the FOMC Minutes.

USD/JPY holds firm near 158.50 ahead of Fed Minutes

USD/JPY hangs close to a one-and-a-half-week high near 158.50 in the Asian session on Wednesday, with bulls now awaiting a move beyond the 200-day SMA hurdle before positioning for further gains ahead of the FOMC Minutes. Meanwhile, a fresh leg up in US bond yields revives US Dollar demand amid geopolitical uncertainties, boosting the pair amid dovish BoJ commentary.

Gold struggles below $4,150 as USD bulls look to FOMC Minutes for rate hike cues

Gold retains its intraday bearish bias through the early European session, eyeing a two-month low around the $4,100 neighborhood touched the previous day. The US Dollar catches fresh bids after Tuesday's corrective slide and is seen as a key factor weighing on the commodity as traders look to the FOMC meeting minutes for a fresh impetus.

Dogecoin extended correction and weakening momentum raise downside risks

Dogecoin extends its losses, trading around $0.090 down more than 5% so far this week. Bearish pressure is strengthening, with short positions reaching a one-month high and traders in overheated conditions. Meanwhile, weakening momentum indicators are also hinting at further losses in DOGE. Derivatives data shows cautious signals among traders.

Indian Rupee hits fresh four-month low, RBI hikes Repo Rate to 5.5%

The Indian Rupee weakens significantly against the US Dollar after a muted response, following the Reserve Bank of India’s monetary policy meeting on Wednesday. The USD/INR pair jumps to near 96.72, the highest level seen in four months. In the policy meeting, the RBI decide to hike its Repo Rate by 25 basis points to 5.5%, the first hike since February 2023.

Eurozone inflation just hit 3.8%, its highest in three years. This chart shows why the ECB can’t simply hike its way out

The ECB would normally have a relatively straightforward answer to inflation running almost twice its target: raise interest rates. But these are not normal circumstances. This time, the bond market is already doing part of the tightening for it, leaving the ECB facing an increasingly difficult dilemma.