Dollar rally resumes as US rates break to new highs

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21 May 2018


We’ve been pointing to the importance of the psychological ceiling of 3% in US 10-year Treasury yields, perhaps the single most watched interest rate in the planet. Last week, the sell-off in US treasuries forced a clean break to the upside for the first time in seven years. Markets reacted as expected: there was a flight from risk assets, and the dollar rose strongly against every other major currency on the planet.

merging market currencies fared particularly badly last week, hit by both the dollar rally and the flight from risk assets. Latin American currencies were hit hard, with the Brazilian Real and the Colombian, Chilean and Mexican peso all losing over 2% during the week.

In a week lacking in major economic or policy news in the G4 currency areas, markets will be paying close attention to the developments in Italy, where a right-populist coalition appears set to form a Government and is making some ominous (albeit so far vague) policy proposals that may put it in a collision course with European institutions.

Major currencies in detail


Sterling resisted the dollar rise better than any other G10 currency, save the Swiss Franc. Strong employment growth in March and an uptick in wages to 2.9% annualised supported the Pound, as did the absence of any bad news from the Brexit negotiations.

This week is a critical one for Sterling. On Wednesday, we’ll get the inflation report for April, and then retail sales follow on Thursday. After the Bank of England made it clear that any further hikes will depend on whether the economic data warrants them, we expect Sterling to be quite volatile after every major release.


German GDP came in a bit below expectations, but this was overshadowed by the news from Italy. The right-wing populist parties agreed on a prime minister. The key uncertainty is the extent to which anti-euro noises made in the past by both parties will be reflected in the final Government programme. Here we note that the most direct challenges to Italy’s membership in the Euro appear to have been left out of the final draft agreement.

We remain optimistic about the confrontation between the new Italian government and European institutions. Nevertheless, it will be worth paying close attention to the spreads between German and Italian bonds, which have once again become a factor in Euro trading.


San Francisco Fed president John Williams sent US bond yields higher last week by suggesting the Federal Reserve may drop forward guidance after policy went back to more neutral settings. As the 10-year Treasury yield broke cleanly above 3%, the US dollar followed it higher.

This week, the minutes from the last Federal Reserve out on Wednesday will be the key macroeconomic event.,