Dollar Rebounds on Deteriorating Bond Market Sentiment
The US dollar has rebounded modestly today due to deteriorating bond market sentiment. The 30-year UST yield is now 25 basis points higher since the FOMC meeting on July 29th, reaching a high of 5.32%, its highest level since 2007.
Curve steepening is gaining momentum in the US and elsewhere, with worsening inflation concerns and the Middle East situation likely contributing to this trend. The increasing demand for capital to finance AI investments may also be playing a role.
Japan's decision to buy yen has led investors to believe that the US is concerned about Japan's need to constantly sell US dollars for intervention through selling UST bonds. This concern was further reinforced by the data released last night, which showed Japan as the largest seller of UST bonds in June, with a $26.4 billion decline.
The global implications of this trend are unclear, but it could potentially lead to a repeat of episodes like January when increased US dollar hedge-related selling picks up and the dollar weakens sharply. However, if the curve steepening is global, it could turn out to be US dollar bullish.