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Why Is The U.S. Dollar Decoupling From Yields?

By Kathy LienMarket OverviewNov 08, 2021 04:45PM ET
www.investing.com/analysis/why-is-the-us-dollar-decoupling-from-yields-200607689
Why Is The U.S. Dollar Decoupling From Yields?
By Kathy Lien   |  Nov 08, 2021 04:45PM ET
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The US Dollar traded lower against all of the major currencies on Monday despite a good jobs report and a rise in Treasury yields. The greenback typically takes its cue from yields as a brighter outlook for the US economy spurs rate hike expectations which can create demand for the greenback.
 
However over the past week, we’ve seen the correlation diminish with the dollar completely decoupling from yields in the last 24 hours. Granted, one day of divergence shouldn’t raise any concerns, but between today’s decline in the dollar in the face of rising yields and its weakness after strong payrolls, investors are beginning to wonder what is going on with the greenback. Risk appetite is not the answer because stocks hit record highs on Friday and Monday yet USD/JPY traded lower both days.   
 
Why is the dollar decoupling from yields? To start, US yields are not the only yields rising. German, Canadian and Australian yields also moved higher on Monday. On a percentage basis, German, Canadian and Australian bond yields rose more than US yields today which, explains the outperformance of EUR, CAD and AUD versus the US dollar.  
 
The rise in yields (or drop in bond prices) is a global and not US story. Also US inflation numbers are due for release this week and economists are looking for hot numbers that will add pressure on the Federal Reserve to consider rate hikes next year. At the same time, some US dollar traders are worried that the stickiness of inflation could squeeze consumers in the coming months. 
 
With the Fed meeting over, US policymakers took to the podium today to talk about rate hikes and there is growing support for two rounds of tightening in 2022. Some investors are worried that consumer demand and US growth could slow on the combination of less stimulus and high prices.
 
With that said, euro’s resilience is impressive. The European Central Bank is one of the most dovish central banks, data has mixed and now countries across Europe are grappling with a fourth coronavirus wave. Germany reported its highest number of daily cases since the pandemic began. Cases in Greece, Russia and the Ukraine are also hovering near record highs. So far, cases in Italy, France and Spain remain contained but the German government expanded booster shots to all adults in a rush to contain the outbreak. Health Minister Spahn says “the country’s fourth coronavirus wave is now in full force.” EUR/USD should be trading lower and not higher.
 
The New Zealand dollar’s outperformance is surprising as well. Like Germany, New Zealand is struggling with record breaking COVID-19 cases. Despite 90% of the population receiving their first jab, new cases in New Zealand hit record highs. However with the Reserve Bank raising interest rates, investors are joining the central bank in looking past the pandemic. The government seems to be doing so as well as Auckland, the country’s largest city is widely expected to go ahead with easing restrictions slightly on Tuesday. Non-essential businesses, libraries, zoos and museums can reopen with social distancing restrictions and mask requirements. The number of people permitted at outdoor gatherings will also increase from 10 to 25. The Reserve Bank became one of the first major central banks to raise interest rates and their confidence in the economy is starting to spread.
 
The Canadian dollar on the other hand was one of the weakest performers. Oil prices rebounded slightly but WTI rejected the 20-day SMA. Last week’s disappointing jobs report appears to have residual impact on the loonie. Sterling rebounded after Bank of England Governor Bailey said they will act if they see wages pushed higher by inflation expectations. The Australian dollar is firmer as well. Business confidence numbers are due for release and we are looking for their outlook to improve as weather and fewer restrictions boost economic activity. 
Why Is The U.S. Dollar Decoupling From Yields?
 

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Why Is The U.S. Dollar Decoupling From Yields?

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Comments (18)
Steve Siew
Steve Siew Nov 09, 2021 9:18PM ET
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Deflation all the way
Ameya Hardas
Ameya Hardas Nov 08, 2021 11:44PM ET
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Simple answer is..massive strength in GBP and earlier EUR
Projit Bairagi
Projit Nov 08, 2021 10:13PM ET
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Thank you for such a detail clarifications.
Felipe Daniel
Felipe Daniel Nov 08, 2021 9:49PM ET
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Like Germany, New Zealand is struggling with record breaking COVID-19 cases. Despite 90% of the population receiving their first jab, new cases in New Zealand hit record highs. Makes you wonder how great the medical experiment is.
Don Getty
Don Getty Nov 08, 2021 9:49PM ET
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reality is the rise in cases are the delta variant which spread easier especially among the unvaccinated - just look at hospitalization numbers - I'm happy to have my double Moderna and will get the booster as soon as its available - you can't help stew pid but you keep spreading your propaganda
Tom Sc
Tom Sc Nov 08, 2021 9:49PM ET
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we had 10k new cases of covid in April and now we are at 2500 with limited restrictions vs when we had 10000 cases. that's the power of vaccine. even the USA is running relatively low and that's with only 60% or not even that many vaxed. vaccines just work. period.
John Smit
John Smit Nov 08, 2021 9:49PM ET
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Don Getty  UK hospitals (as per UK Health Security Agency weekly tracker report - pdf is on their website, check it if you don't believe me) for last week: 82% of hospital admissions and deaths (within 28 days of positive test) are the DOUBLE VACCINATED. How do you explain that please? Ditto infections, over 80% of infections are DOUBLE VACCINATED. Please explain to us how this happens.
John Smit
John Smit Nov 08, 2021 9:49PM ET
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Tom Sc  Please explain this statistic, this despite Germany having a high vaccination rate: Germany reported its highest number of daily cases since the pandemic began. Please enlighten us Mr Tom.
Kevin Avila
Kevin Avila Nov 08, 2021 9:08PM ET
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No rate rises… “Let them eat cake!”
mario can
mario can Nov 08, 2021 6:06PM ET
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I'd take this as sell the dumpster fire
Đẹ Phan
Đẹ Phan Nov 08, 2021 5:39PM ET
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thanks
Derrick Smart
Derrick Smart Nov 08, 2021 5:35PM ET
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Thanks
Vonn Miller
Vonn Miller Nov 08, 2021 5:29PM ET
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Ayyye clutch info
Vonn Miller
Vonn Miller Nov 08, 2021 5:29PM ET
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Ayyye clutch info 💪💪💪
Thanos theBear
Thanos theBear Nov 08, 2021 5:16PM ET
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the best writer.
Luqman Firdaus
Luqman Firdaus Nov 08, 2021 5:12PM ET
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money ✌❣
Luqman Firdaus
Luqman Firdaus Nov 08, 2021 5:11PM ET
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ok💕
Sudeysi sufiyaan
Sudeysi sufiyaan Nov 08, 2021 5:07PM ET
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👍👍
Itz Martins
Itz Martins Nov 08, 2021 5:07PM ET
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Help any one
Jarred Stanford
Jarred Stanford Nov 08, 2021 5:06PM ET
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might want to look at more than today's chart. yields are lower than they have been all month outside of Friday. dollar is relatively high compared to the rest of the month. dollar jumped last week expecting higher rates, but rates just got lower instead.
James Pattison
James Pattison Nov 08, 2021 5:05PM ET
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Inflation is anywhere and everywhere a monetary pronlem… we have entered a wage/price death spiral… the fed will not stop the cycle… crypto will rise like we have never expected… and the dollar will huper inflate… every policy set forth since 2020 has been to push mac inflation… if interest rates rise… the us will choke on its own debt in a debt to gdp parabolic curve amd the dollar will lose its world status… hello btc
Catharine Varady
Catharine Varady Nov 08, 2021 5:05PM ET
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i have similar thought. let's see how it goes
John Smit
John Smit Nov 08, 2021 5:05PM ET
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All sounds great, but the Dollar Milkshake theory doesn't support your analysis.
RS HS
RS HS Nov 08, 2021 5:03PM ET
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Hellp urdo
 
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