Dollar Under Pressure as Yields Continue to Fall and Retail Sales Disappoint
The US dollar has been under downward pressure in recent days due to short-term US yields continuing their decline. The 2-year US Treasury yield hit a fresh low of 4.10% on Friday, falling below its high from last month at 4.37%. Meanwhile, the slope of the US yield curve has steepened as long-end yields have remained close to year-to-date highs.
This unfavorable backdrop for the dollar is not yet sufficient to trigger another leg lower in the dollar index, which has held above support from its 200-day moving average at around 99.200. However, the performance of US dollar over the past week has been mixed, with oil-related G10 currencies such as the Norwegian krone and Canadian dollar performing well due to higher energy prices.
The ongoing correction in short-term US yields was reinforced by a softer-than-expected US retail sales report for July. According to Citi's US economic surprise index, this has led market participants to scale back Fed rate hike expectations. The US rates market is now pricing in around 34bps of Fed hikes by April next year, down from 57bps previously.