US Dollar: Flatter curve supports currency – ING

ING’s Chris Turner notes that the Dollar is benefiting from a flatter US yield curve as hot inflation data keeps short-dated rates elevated while long-dated Treasuries recover. He argues this backdrop typically favors the Dollar versus activity and emerging market currencies.

Dollar holds firm on curve dynamics

"The big takeaway this week has been the recovery of the long-end of the US Treasury market, even as inflation data continues to come in hot. Here it seems that investors are starting to find value in long-dated Treasuries and are viewing those as a middling hedge against a correction in the AI trade. Were the tech sell-off to gain momentum, that Treasury buying would move to the shorter end of the curve."

"Inflation data is keeping short-dated interest rates supported and has delivered a near 20bp flattening in the 2-10 year Treasury curve this week."

"Typically, an environment where the Fed is applying the brakes while growth prospects are being revised down is good for the dollar against activity and emerging market currencies. It is only when short end rates break lower that the dollar is ready to drop. And we are not there yet."

"Barring another big leg down in AI stocks and risk assets in general, expect the dollar to consolidate near recent highs. We would continue to expect some defensive outperformance of the Swiss franc in this environment."

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