The US Dollar is experiencing a rebound, thanks to the surging real yields in the United States. This trend is rewarding bullish investors, while also making bearish investors think twice before betting against the dollar.
On Tuesday, the real yield on US 10-year Treasuries reached 2.47%, its highest level in almost 15 years. This increase in real yields has made it more profitable to invest in the US currency, as bullish investors can earn yield while holding onto their dollar positions. As a result, the dollar has risen by 7% from its 2023 lows against a basket of currencies, reaching a 10-month high.
Moreover, climbing real yields have also made it more expensive for bearish investors to bet against the dollar. Shorting the currency now requires paying higher borrowing costs. This is reflected in the data from the Commodity Futures Trading Commission, which shows a net long position of $3.07 billion in dollar futures contracts for the week ended on September 26. This is a significant reversal from the short position of $21.28 billion seen earlier this year.
According to Karl Schamotta, Chief Market Strategist at Corpay in Toronto, “The dollar isn’t just the nicest house in a bad neighborhood right now, it’s the only game in town.” With real yields continuing to rise, only the most daring traders are willing to bet against the greenback.
The Federal Reserve’s commitment to maintaining higher rates for an extended period, coupled with the comparatively strong economic growth in the US, has contributed to the surge in nominal yields to the highest level since 2007. Combined with a deceleration in inflation, this has propelled real yields to new heights.
Multiple factors have come together to fuel the dollar’s rebound. These include the resilience of the US economy, which has made it a relatively more attractive destination for investments compared to the struggling economies of Europe and China. Additionally, nervousness about the decline of Wall Street, with the S&P 500 falling 7% from its July high, has stoked investor interest in the dollar.
UBS Global Wealth Management strategists assert that “The near-term risks are skewed toward additional US dollar strength.” They attribute this to the disappointment in the performance of Europe and China, while US rates remain high and economic growth remains robust.
The dollar’s movements have closely tracked real yields in recent years, leading even bearish investors to approach with caution. Aaron Hurd, Senior Portfolio Manager at State Street Global Advisors, believes that the dollar is overvalued against a broad range of currencies, including the yen. However, due to the high real yields, he is hesitant to short the US currency.
Schamotta from Corpay believes that, for now, the dollar remains well positioned. He anticipates a pivot in the future as relative economic surprise indices begin to shift against the dollar, but for the time being, the trend favors dollar bulls.