US yields boost the dollar

US dollar rebounds as US yields climb

Rising US yields saw the US dollar stage an abrupt change of direction overnight, with the dollar index climbing 0.33% to 89.82. The dollar index has ground higher to 89.85 today and is threatening resistance at 90.00. A weekly close above 90.00 would signal that the US dollar squeeze will continue. Notably, the dollar index has no meaningful technical resistance until 91.00.

The major and commodity currencies all retreated overnight, with the Australian and New Zealand dollars notably weaker. Both Australasians though remain well entrenched in technical uptrends, and only falls through 0.7600 and 0.7150 would threaten the underlying bull markets. USD/JPY staged an impressive rally to 103.80 overnight and bears monitoring. USD/JPY is extremely sensitive to US/Japan rate differentials, and if US yields keep rising, USD/JPY could test its multi-month down channel around 104.50. That could be a hint that a much broader US dollar short squeeze could sweep markets in January.

Other Asian currencies remain mostly unmoved as international investors continue to pile into local markets on the cyclical recovery trade. Regional currencies remain near their recent highs versus the greenback. Notably, though, the Chinese yuan has failed to make further gains after the strong fixing at the start of the week. USD/CNY remains around 6.4500 with the PBOC printing a series of higher USD/CNY fixes in the past few days. That may signal that the PBOC thinks the CNY has done enough against the dollar for now, and that intervention could increase. A short-dollar squeeze in the G-10 space could push the CNY higher on a TWI basis and prompt the PBOC to move the USD/CNY higher more aggressively. That would almost certainly produce a squeeze in short dollar positioning amongst regional Asian currencies as well.

With the FOMC meeting not until the end of January, and with the world short to the eyeballs in US dollars, it could be a cold winter for dollar bears to start the year. Everything will depend on US yields. If they continue moving higher, that could prompt a January short-dollar capitulation. On the bright side of things for dollar bears, the first big move in January is usually the wrong one for the year as a whole.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia as well as in leading print publications including the New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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