Why Did the US Dollar Appreciate with Bond Yields?

US dollar gains as bond yield surge

The US dollar index saw one of the best weeks in over a year as the US dollar surged past many major currencies on the back of strong economic data and higher bond yields. The US dollar index closed last week at 91.31, appreciating 1.37% versus a close of 90.08 for the week ending April 20. Economic data that helped the surge of the US dollar included an upward-revised consumer confidence index, strong durable goods orders, and a higher-than-expected Q1 GDP growth. Surging bond yields have also contributed to the gains of the US dollar, as the positive correlation between yields and the US dollar started to work again.

Why Did the US Dollar Appreciate with Bond Yields?

Speculators continue to bet against the US dollar

As per the latest “Commitment of Traders” (or COT) report released on April 27 by the Chicago Futures Trading Commission (or CFTC), large speculators and traders have trimmed their short positions on the US dollar index.

As per Reuters calculations, net US dollar (USDU) net short positions decreased from 2,415 contracts to 1,781 contracts. This amount is a combination of the US dollar’s contracts against the combined contracts of the euro (FXE), British pound (FXB), Japanese yen (FXY), Australian dollar (FXA), Canadian dollar (FXC), and Swiss franc.

Key events for the US dollar this week

There are many important events lined up for the US dollar (UUP) this week. Demand for the US dollar could be driven by bond yields and overall market sentiment. But key economic data—including inflation and non-farm payrolls data—could also influence demand for the US dollar. The FOMC meeting, which concludes on Wednesday, is likely to be a non-event, as no rate hike is expected at this meeting. The US FOMC is likely to use this meeting to prepare markets for a rate hike in June and the tone of the statement, if optimistic, could help further gains in the US dollar. If the FOMC doesn’t advertise its intentions for a rate hike, we can expect the US dollar to depreciate after the statement.