Analysis: Investors Trust Real Yields to Boost Dollar in Coming Months

NEW YORK, Feb 3 (Reuters) – The dollar’s choppy start to the year hasn’t deterred some investors from betting the U.S. currency will soon resume its upward march, buoyed by an aggressive Federal Reserve and rising real yields.

The US dollar index remains flat on the year, masking a volatile ride that saw the dollar swing between gains and losses in January as investors recalibrated how aggressively the Fed will tighten monetary policy in the coming months. Against a basket of currencies, the dollar has risen 5% over the past year.

Investors say the fate of the dollar from here will be determined in part by real yields, or what a US government bondholder expects to receive adjusted for inflation, which has moderated in recent days. after rising last month.

Rising real yields tend to make the dollar more attractive to investors and have been a source of support for the greenback in the past. Although they have broken off recent highs in recent days, some are betting that real yields will continue to rise in the coming months if the Fed maintains its aggressive stance, dragging the dollar higher.

Since the pandemic, real rates have been buoying the dollar…that’s also evident today,” said John Velis, FX and macro strategist at BNY Mellon.

The yield on 10-year Treasury Inflation-Protected Securities (TIPS) recently stood at -0.66%, after hitting a 19-month high of -0.539% on January 26. Federal funds futures are currently trading a full 118 basis points higher by the end of the year.

A rising dollar has far-reaching implications for everything from corporate profits to fighting inflation. A stronger dollar allows US consumers to buy goods, services and resources from other countries at lower prices, but it can hurt the profits of US companies that export or rely on global markets for most of their sales.

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