By Saqib Iqbal Ahmed
NEW YORK (Reuters) – Rising U.S. real yields are supporting the dollar’s recovery and rewarding bullish investors while making bears think twice before betting against the dollar.
The real 10-year U.S. Treasury yield – which measures how much investors can earn on U.S. Treasury bonds after inflation is eliminated – reached 2.47% on Tuesday, its highest level in nearly 15 years, according to U.S. Treasury data. Ministry of Finance.
This has made betting on the US currency more profitable as bullish investors can earn returns while sitting on their dollar positions. The dollar is up 7% against a basket of currencies from its 2023 lows and is at a 10-month high.
At the same time, rising real yields make it more expensive to bet against the dollar. Bearish investors who take short positions have to pay more to borrow the currency.
According to the Commodity Futures Trading Commission, dollar positioning in futures markets had a net long position of $3.07 billion in the week ended Sept. 26. That was a significant turnaround from a $21.28 billion short position earlier this year.
“The dollar isn’t just the nicest house in a bad neighborhood right now, it’s the only game in town,” said Karl Schamotta, chief market strategist at Corpay in Toronto. As real yields rise, “only the boldest traders are willing to bet against the dollar,” he said.
The Federal Reserve’s determination to keep interest rates higher for longer and relatively strong U.S. economic growth have helped nominal yields rise to their highest level since 2007. This, coupled with a slowdown in inflation, has led to a rise in real yields.
Its rise has merged with other factors to fuel the dollar’s recovery. The greenback is up 3% against a basket of currencies this year.
Other factors include a resilient economy that has made the US a relatively more attractive investment and whose growth is more stable than struggling Europe and China. The dollar also got a boost from investors nervous about the decline on Wall Street, with the S&P 500 down 7% from its July high.
The story goes on
While U.S. interest rates remained high and growth held steady, “Europe and China have disappointed,” UBS Global Wealth Management strategists wrote in a recent note.
“In our view, the short-term risks are more towards further US dollar strength.”
The dollar has tracked real returns in recent years, with peaks and troughs closely spaced.
This has caused even pessimistic investors to shy away from betting against the US currency.
Aaron Hurd, senior portfolio manager at State Street Global Advisors, said the dollar is overvalued against a variety of currencies, including the yen, whose sharp decline this year has left investors waiting for intervention from Japanese policymakers.
Still, high real yields make him wary of shorting the U.S. currency.
“I’m not going to pay 5.5% to 6% a year in interest to shorten this,” Hurd said.
“They have one of the highest-yielding currencies in developed markets. It has the strongest growth in developed markets and provides a hedge for risky assets. This is a kind of nirvana,” he added.
The dollar remains well positioned for now, Corpay’s Schamotta said.
“There will be a turning point – we expect the relative economic surprise indices to shift against the dollar within the next two months – but for now the trend is the friend of the dollar bull,” Corpay’s Schamotta said.
(Reporting by Saqib Iqbal Ahmed, additional reporting by Chuck Mikolajczak; Editing by Ira Iosebashvili and David Gregorio)
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