Dollar Index Set for Continued Rally Despite Central Bank Tightening

The US dollar index (DXY) rallied to near a one-month high last week and is expected to continue benefiting from widening US-G6 interest rate differentials and rising US longer-term real yields.

The break in the 10-year Treasury yields above 5.00% is driven by higher real yields rather than a breakout in the 5y5y inflation swaps, reflecting the resilience of US economic activity.

Tightening by other major central banks limits policy divergence with the Fed and suggests DXY could struggle to sustain an overshoot of its June 24 high at 101.80.