SocGen: This will be key to how the US dollar performs ahead

U.S. two-dollar billsPhoto by Leslie Shaffer

How the dollar performs ahead will probably depend on how markets react to the U.S. 10-year Treasury yield potentially breaking above 3 percent, Kit Juckes, global head of foreign-exchange strategy at Societe Generale, said in a note on Monday.

“A clean break, unaccompanied by a pick-up in volatility and sell-off in risk assets, would force dollar shorts to capitulate and at the very least, severely test EUR/USD 1.2150,” he said. “But if the market can’t hold above 3 percent, if the talk rapidly becomes one of concern about debt levels and if the Fed leans back against a bearish market, then any short-term dollar bounce is just that, and a chance to sell.”

But he added that 3 percent “isn’t a magic number,” and the level itself might not be significant.

“What does matter is if there’s a reason for the market to change its assumption that the Fed is on a gradual path to a low funds rate while the administration is well down a dangerous path to late-cycle fiscal accommodation,” he said.

The 10-year U.S. Treasury yield was at 2.98 percent at 10:11 P.M. SGT on Monday; the dollar index, which measures the greenback against a basket of currencies, was at 90.8380, up from around 90.32 on Friday. The euro was fetching S$1.2221 at 10:15 P.M. SGT Monday.