The US Dollar (USD) rally may be coming off the boil. A lower close for the Dollar Index (DXY) yesterday signals some—potential—technical headwinds for the index for starters and markets may be getting a little concerned about one of the essential drivers of the October rebound, Scotiabank’s Chief FX Strategist Shaun Osborne notes.
“Rising Treasury yields have provided strong tailwinds for the USD amid still resilient economic data. But there is evidence that some of the firming trend in yields is the result investors demanding a greater premium for holding long term US Treasury debt. The NY Fed’s estimated term premium has nudged up to around 20bps, likely reflecting concerns about tariff risks and US fiscal sustainability as the US presidential election race tightens.”
“Stocks are up slightly while bonds are mixed—European debt is (mostly) a little softer while US Treasurys are outperforming modestly. Positive US data surprises have been running at their strongest since the spring, reflecting both the resilience of the US economy and market observers underestimating the durability of growth momentum. Durable goods are expected to fall 1.0% in September, with the ex-transport figure expected to fall just 0.1%.”
“Better than expected data might give the USD a small lift today but an overbought DXY looks increasingly prone to some, minor at least, corrective losses. Weakness in the index below 104 may prompt a further decline towards 103.40/50. Note Japan goes to the polls this weekend, with the ruling LDP at risk of losing its lower house majority.”
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