DXY Slips Below 99 as Fiscal Concerns Offset High Yields
The US dollar index (DXY) is struggling to stay above 99 as it faces a credibility test ahead of key inflation and monetary policy events. The DXY slipped to roughly 98.96 on Tuesday, unable to preserve Monday's modest rebound from three-month lows.
The currency gauge measures the dollar against six major currencies, with a heavy weighting towards the euro. Below 99, the greenback is not projecting unstoppable reserve-currency energy. Washington's plan to expand Treasury bond buybacks has revived the 'debasement trade', where investors buy scarce assets due to potential government intervention reducing a currency's purchasing power.
The policy aims to lower long-term borrowing costs, but markets are interpreting it as 'more support, potentially softer dollar'. The contradiction is significant, and two-year Treasury yields remain near 4.25% and ten-year yields around 4.70%, levels that normally support the dollar.
However, fiscal concerns are offsetting this advantage, proving high yields aren't automatically bullish when investors question why they're up there. Inflation will get the deciding vote on Wednesday with the release of July PCE inflation data at 8:30 a.m. ET, expected to rise 0.2% monthly and 3.3% annually.
A hotter print could revive rate-hike bets, lift Treasury yields, and drag the buck back above 99 towards the psychological 100 level. Softer inflation could reinforce the debasement trade, exposing 98 and recent lows. Fed Chair Kevin Warsh speaks at Jackson Hole on Friday, where traders want guidance on rates, bond-market stress, and central-bank independence.