US Dollar Firm as Long-Term Yields Remain Near Cycle Highs

The recent US inflation data has provided some relief to the bond market, but it's not enough to weaken the US dollar sustainably. The July US CPI report showed a 0.1% month-on-month increase in headline CPI and a 0.2% rise in core CPI, which was almost precisely in line with expectations.

However, the more interesting development came later, as only the front end of the Treasury curve retained much of the move. The result was a bull steepening of the US yield curve, with longer-dated yields giving back much of their initial decline. This distinction matters for the US dollar, as a softer Fed path at the front end does not necessarily translate into a softer US dollar if the rest of the curve refuses to rally.

The yen remains under pressure, with USDJPY above 159 due in part to elevated long US Treasury yields. Japanese wholesale inflation rose 7.2% year-on-year in July, prompting markets to bring forward expectations for the next Bank of Japan hike toward September. However, the JPY reaction has been modest, and if intervention is unable to generate a durable JPY rally, it may indicate how powerful the carry headwind remains while US long-term yields stay high.

The story extends beyond JPY, as EURCHF pushed to a new 2026 high above 0.9380, continuing pressure on the zero-yielding Swiss franc. EURSEK also burst back above 11.00 and traded toward the 11.05 area, suggesting that carry considerations are reasserting themselves in FX.

Sweden's policy rate remains at just 1.75%, making next week's meeting unusually interesting even if no policy move is expected immediately. The Riksbank makes its decision on Wednesday, August 19 and publishes it on Thursday, August 20. Market pricing has been assigning something close to even odds to a hike by the September meeting.