US dollar recovers from 2018 lows on rising Treasury yields and stimulus hopes

Vrasidas Neofytou
Head of Investment Research

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The US dollar has been the top performing currency since last week, gaining support from a spike in US Treasury yields, the Biden’s stimulus agenda, hopes for US economic growth and expectations for higher inflation.

The greenback continues to recover from 3-year lows after the Democratic party won control of the US Senate last week, which propelled expectations for bigger fiscal stimulus packages to shore up the US economy. 

President-elect Joe Biden has promised further pandemic-relief fiscal spending following the disappointing non-farm payrolls for December, financed with more Treasury debt and taxes.

The 10-year Treasury bill crossed the 1.10% yield level for the first time since March, sparking speculation that a long period of interest rate compression could be reversing.

The dollar valuation has improved against major currencies since the US real yields are rising faster than global counterparts together with the shift by the Federal Reserve to allow higher inflation.

The surge in bond yields and market inflation expectations have been enough to pause the bearish bets against the greenback. The dollar index rose near the 91 level, after dropping as low as 89 last week, which was 12% lower from March highs. 

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