Dollar Rally Halted as Fed Rate Cut Expectations Rise

The US dollar's upside potential remains limited as Treasury yields ease, according to MUFG analysts. The currency has struggled to gain sustained momentum, with the yield differential between US and other major economies narrowing.

When yields fall, the return on dollar-denominated assets becomes less attractive, reducing foreign demand for the currency. This dynamic has been particularly evident as markets reassess the Federal Reserve's policy path.

The 10-year Treasury yield has retreated from recent highs, reflecting growing expectations that the Fed may begin cutting interest rates later this year. Futures markets are pricing in a significant probability of a rate cut by September, according to CME FedWatch data.