This article explores the strong correlation between the rising US dollar and increasing bond yields. While the recent trend suggests a direct link, historical data reveals a more complex relationship. The article delves into the reasons behind this correlation, highlighting the dollar's role as the world's reserve currency and its impact on international trade, borrowing costs, and global economic activity.
, explains that the recent 1% increase in yields, as shown below, is almost entirely due to negative sentiment. As we wrote, the bond market calls sentiment the term premium. Of the 1% yield increase, only 10% is due to fundamental factors, leaving 90% a function of bond investor concerns.
The second graph, spanning the post-financial crisis to the present, and the third, dating back to 1973, have positive correlations over their respective periods, but the relationships are not statistically significant. Furthermore, the correlation constantly shifts back and forth between positive and negative.
Additionally, some foreign exporters hedge against adverse currency movements. While hedging helps protect profits against currency changes, it feeds the stronger dollar. Borrowers worried about rising debt costs due to the dollar may pay back their debt early. Doing so requires them to sell their home currency to buy the dollars necessary to pay it back.Outside of trade and trade-related activities, other factors can impact currency values. At times, central banks’ role in regulating currency values is among the most significant.
BOND YIELDS DOLLAR STRENGTH GLOBAL ECONOMY FOREIGN EXCHANGE INTEREST RATES
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