Dollar in Doldrums as Traders Rethink Reflation Trade Amid Yield Struggles

© Reuters.

By Yasin Ebrahim

Investing.com – The dollar fell against its rivals Thursday, and remains set to snap a three-week winning streak as the reflation trade that had pushed bond yields appear to be running out of steam.

The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, fell 0.43% to 92.07.

The dollar followed U.S. bond yields higher, which trade inversely to price, as investors are begging to release "the bar for the next leg of the sell-off is thus getting higher," Commerzbank (DE:CBKG) said.

Bets the Fed will be forced to blink on monetary policy in the wake of positive economic news and growing inflation are turning more nuanced as markets have already priced in a Fed lift off in 2022. The central bank continues to reiterate easy monetary policy is here to stay.

"With few left who are not bullish on US growth, markets already way ahead of the Fed (the FOMC's median dot is unchanged until 2024) and the Fed reluctant to push the exit debate, the bar for the next leg of the sell-off is thus getting higher," Commerzbank said.

Federal Reserve Chairman Jerome Powell on Thursday echoed the Fed's narrative of lower for longer rates and the steady monthly purchase of bonds.

"There is a brighter outlook for the U.S. economy from fiscal support, vaccines, but unevenness in recovery is a serious issue," Powell said during an IMF panel discussion. "We want to see a string of months like the March jobs report to see progress."  

The Fed chief also continued to downplay the risk of runaway inflation in the wake of the supply chain bottlenecks and the reopening of the economy.

"There is a brighter outlook for the U.S. economy from fiscal support, vaccines, but unevenness in recovery is a serious issue," Powell said during the discussion. "We want to see a string of months like the March jobs report to see progress."