US dollar surges as US short-term yields hit 22-month highs

As traders trickle back to their desks to start another year, there’s one market move dwarfing all others: The US dollar is trouncing its major rivals. The chart below highlights the move, with the so-called commodity dollars (the Canadian, New Zealand, and Australian dollar) bearing the brunt of the selling (for more on USD/CAD, see my colleague Joe Perry’s Currency Pair of the Week article):

Source: FinViz

So what’s driving the big move in the greenback?

As always, one of the strongest cross-market correlations is between short-term interest rates and currencies. As the chart below shows, the 2-year US Treasury yield is trading up 5bps already today to its highest level since the start of the pandemic 22 months ago:

Source: Tradingview, StoneX

While we haven’t necessarily gotten any new “news” on the outlook for interest rates, it’s clear that investors are more confident than ever that the Federal Reserve will seek to “normalize” monetary policy in 2022. As a reminder, the median Fed voter has indicated that he/she expects 3 interest rate hikes this year, and two-thirds (12/18) of members anticipate at least that many rate increases.

On that note, the economic calendar will be ramping up throughout the next couple of weeks, with both traders and policymakers keen for the latest ISM surveys (Manufacturing tomorrow and Services on Thursday), readings on the labor market (ADP on Wednesday and NFP on Friday), inflation figures (CPI next Wednesday and PPI next Thursday), and retail sales (next Friday) out of the US.

Technical view: US Dollar Index (DXY)

The widely-followed US dollar index has spent the last seven weeks consolidating in a sideways range between roughly 95.50 and 97.00. After drifting down to the bottom of that range in low-liquidity holiday trade last week, buyers have stepped in aggressively to defend support near 95.50 to start this week; the rising 50-day EMA also comes in around that area, creating a confluence of support levels within the longer-term uptrend.

Source: Tradingview, StoneX

Looking ahead, continued rising yields could take the US dollar index back to its 18-month highs near 97.00, with a breakout above that level opening the door for more strength through the first half of the year. Meanwhile, only a breakdown from the recent range and the rising trend line near 95.00 would erase the medium-term bullish outlook for the US dollar index.

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the company you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.