Dollar Finally Catches Up With Its Drivers
The US dollar had a strong start to the week, finally aligning with its supportive short-term drivers. The front-end rates, higher energy prices, and soft risk sentiment all contributed to the dollar's gain. The dollar index (DXY) saw its strongest session since August's Jackson Hole speech.
US 10-year yields touched 5% yesterday, but this is not cause for panic. A 50bp premium over the neutral rate of 4-4.5% is still tolerable. The question remains whether this represents a pain threshold for the Treasury, which could lead to new intervention.
The dollar may stabilize ahead of tomorrow's key FOMC announcement, but risks remain on the upside. The yen has lost its idiosyncratic push, and USD/JPY is now back at 155.0. Upside risks extend to 156-157 in the near term.