US Dollar: Yield support and AI risks – MUFG

MUFG’s Derek Halpenny notes the US Dollar consolidating at new highs above 103 on DXY, supported by a sharp 2-year UST yield move and rising risk aversion linked to poor tech sentiment and a global Microsoft outage.

US Dollar strength anchored in yields

"One source of US dollar selling might come from Japan. FM Katayama has again warned against “sharp, one-sided” FX moves and underlined the close relationship with the US."

"The US dollar is consolidating at new highs above the 103-level on DXY, levels not seen since the Liberation Day period in April 2025."

"A global Microsoft outage will like add to the recent poor tech sentiment that may intensify recent risk aversion, which in turn will hurt the high-beta G10 currencies further versus the US dollar."

"Still, while a 25bp rate hike from the Fed is the base-case, we need to be mindful of the risks. Another strong jobs report and a further rebound in energy prices would likely see further pricing for a 50bp move, or a number of back-to-back hikes – we are close to priced for a back-to-back hike in Dec-Jan and about 10bps short of three consecutive 25bp hikes through to March. The reversal of optimism over an end to the US-Iran conflict has reinforced this pricing and higher front-end yields."

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