The negative run of US economic data triggered more declines in yields yesterday. And given that US bond yields have not been this low since mid-September, the dollar is struggling to rebound with any conviction.
Fed's Williams attempted to be the lone soldier to stand in front of the yields retreat, but markets are unlikely to buy what the Fed is selling after the recent downshift signal.
The US dollar has had quite the sell-off in the past few weeks post the soft CPI, and the JPY has benefited the most among major currencies.
Interestingly the USD/JPY decline has been quite significant relative to the more moderate drop in the real 10-year spread, breaking a previously strong correlation. While this never tends last as 10-year real differentials are usually the dominant driver, QE trends have also mattered.
The US fixed income rally has allowed BoJ QE to wind right back, and now the pace of JGB purchases is similar to earlier in the year before the episodes where the BoJ stepped up to defend YCC and intervened in the yen.
The energy picture has steadily improved in recent months - as oil has eased and Asian spot LNG prices have halved, this is helped Europe and the much-beleaguered euro. While things are nowhere near rosy but also not as bad as feared at times this summer, this adds some critical context to recent FX moves, so it's not just about inflation and the Fed.