Will yields continue to support the dollar?

Dollar Index advances slightly today by 0.1% and maintains the level of 104.4, which is close to the highest levels since mid-February.

The US dollar had rebounded at the beginning of this year with the return of bond yields that had fallen from their highest levels since 2007, which they reached last October.

Before the end of last year, the markets expected that the Federal Reserve would begin reducing interest rates at its meeting last March. While these expectations began to dissipate little by little with successive inflation data and accelerating economic activity, accordingly, expectations have now shifted to next June, with rates being reduced two subsequent times for the rest of the year.

This shift in the then very optimistic outlook pushed bond yields to regain some of their previous gains and continued to support the US dollar against other major currencies. This ongoing disruption in expectations about the future raises risk levels in a bond market that moves closely with interest rate expectations and economic growth.

Looking forward to today, the markets appear to be more confident in their current expectations about the path of monetary policy through the second half of this year, and this was reflected in the decline in investor fears in bond markets, with the ICE BofAML MOVE Index, which moves according to Treasury bond options prices, reaching its lowest level since February of last year.

The stability of current expectations about the three-cut path for this year may prevent further rises in bond yields and provide investors with a better ability to make an investment decision benefiting from very high yields with certainty that they will not return to the previous year’s highs in the near future at least, that is, making sure to actually buy the bottom.

While the key support for the US dollar may remain the decline of other major currencies, with a number of negative factors surrounding the countries of those currencies, most notably the Eurozone, which still lacks the ability to restore growth in the near term.