Dollar Stabilization Ahead: MUFG Analysts Dismiss Debasement Scares

The US Dollar has been under pressure in August, but recent price action suggests it's no longer a one-way sell-off. The DXY index remains weaker across most major crosses, with a decline of around 2% against the Australian Dollar this month and roughly 0.8-1.1% against the Sterling, Euro, and Canadian Dollar. However, MUFG fx analysts have found that past episodes of simultaneous Dollar weakness, rising gold, and higher Treasury yields did not result in persistent USD losses.

According to MUFG's analysis, 'extreme readings' in the signal were not followed by persistent USD weakness. Instead, the DXY index typically stabilized after those episodes, while gold frequently corrected over one to three months. High-yielding emerging-market currencies also tended to outperform safe-havens such as the Yen and Swiss Franc.

The crucial distinction in the current episode is the high level of long-term Treasury yields, which remain above 4.72% for the US 10-year yield and above 5.2% for the 30-year yield. MUFG sees 'the more likely outcome' as Dollar stabilisation and gold consolidation rather than accelerating flight from US assets, unless yields start falling materially.