Dollar will Stabilize when Yields Stop Falling

Saying the U.S. dollar is falling out of bed would almost be an understatement given the recent price action in the greenback. Over the past three months, the dollar lost more than 10 percent of its value against the euro, Swiss Franc and Australian dollar. Since July, every one of the G10 currencies outperformed the debilitated buck and the latest dollar dump has even driven some currencies to significant highs. The greenback is the one currency that no one wants to own right now but the currencies that are in greatest demand are the Japanese Yen, Swiss Franc, and Australian dollar. The reason why investors are buying the Swissie and Aussie in size is because of their stable economies, healthy economic outlook and correlation with gold prices. The Yen on the other hand is being bought not because their economy is performing better than the U.S., but because investors are seeking safety in low yielding currencies that are not the dollar, the Chinese are buying Japanese bonds, exporters are hedging and carry trades are continuing to unwind their long dollar, short yen positions.

Today’s sell-off in the dollar today pushed the euro above 1.40, the Yen to a fresh 15 year high against the greenback, the Swissie and Aussie to a record high. Although the weakness of the dollar can be attributed to concerns about the U.S. labor market, the primary reason why the dollar came under assault is because U.S. yields continue to fall. Of course these factors are related since weaker economic data raises the chance of the Fed following through with additional asset purchases which are bearish for yields, but what is important is that bond traders have been particularly in tune with the market’s sentiment. Two year Treasury yields fell to a fresh record low of 0.359 percent while ten year yields dropped to the lowest level since January 2009. The dollar will continue to fall as long as U.S. yields continue to decline. If there is any hope for a rebound in the greenback, we would need to see U.S. yields stabilize first. The following chart shows the strong relationship between USD/JPY and U.S. yields. Since the beginning of the year, the correlation between these instruments on a week to week basis has been approximately 90 percent!

About Kathy Lien 236 Articles

Kathy Lien is an Internationally Published Author and Chief Strategist of, one of the world’s most popular online websites for currency research. Her trading books include the highly acclaimed, Day Trading the Currency Market: Technical and Fundamental Strategies to Profit form Market Swings (2005, Wiley); High Probability Trading Setups for the Currency Market E-Book (2006, Investopedia); and Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game (2007, Wiley). As Chief Currency Strategist at FXCM, Kathy is responsible for providing research and analysis for DailyFX, the research arm of FXCM. She also co-edits the BK Forex Advisor, an Premium Service with Boris Schlossberg – one of the few investment advisory letters focusing strictly on the 2 Trillion/day FX market.

Kathy is also one of the authors of Investopedia’s Forex Education section and has written for, the Asia Times Online, Stocks & Commodities Magazine, MarketWatch, ActiveTrader Magazine, Currency Trader, Futures Magazine and SFO. She is frequently quoted by Bloomberg, Reuters, the Wall street Journal, and the International Herald Tribune and has appeared on CNN, CNBC, CBS and Bloomberg Radio. She has also hosted trader chats on EliteTrader, eSignal and FXStreet, sharing her expertise in both technical and fundamental analysis.

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