Are Interest Rates No Longer Driving the Dollar?

<br /> Are Interest Rates No Longer Driving the Dollar? – Marc to Market<br />


The US 10-year yield is at its highs for the year, and yet the US dollar has been struggling
to gain traction.
 Some suggest that this means that the
dollar rally is over.  Charts like this one are circulating among market
This  Great Graphic was
created on Bloomberg.
The white line is the Dollar Index, and the yellow line is the US 10-year
  The two look highly correlated over
the past six months, until very recently.
We are not
 First, one can see on the chart
other times over the past six months where the relationship looked less tight but did not signal a change in drivers.
Second, correlation is not something that can always be eyeballed, especially
when the chart shows two-time series with
two different scales. It could be an exercise in curve fitting.  
We ran the
correlation calculation on the basis of
the percent change in the Dollar Index and US yields.  
Over the past 60 days, the correlation is
0.61.  It has been fairly stable since the middle of October  (weeks
before the US election).   At the end of January 2016, the correlation was
negative. The correlation over the past 30 days is 0.66.  That is to say that the correlation is higher for the more recent period than the earlier period
picked up by the 60-day correlation.   
As you recall,
the Dollar Index is heavily weighted to
the euro and currencies that move in its orbit, like the Swiss franc and
Swedish krona. 
 We took a closer look at the
correlation between the dollar-yen and the US 10-year yield.  The pattern
is the same, in that the correlation is higher for the short-term period than
the longer one.  Specifically, again on the percent change basis, the
dollar-yen rate and the 10-year yield has almost a 0.68 correlation over the
past 60 days but almost a 0.86
correlation over the past 30 days.  As a general rule, running a
correlation on less than 30 data points is not regarded as a sufficiently
We have often
found a fairly good fit between the US-German two-year interest rate
differential and the euro-dollar exchange rate. 
This relationship also remains intact.  Again we
conducted the correlation on the basis of
percent change.  Over the past 60 days,
the correlation between the percent change in the euro and the two-year
differential is about 0.65.  Over the past 30  days, the correlation
is near 0.73.  
One difference
between rising yields now and late 2016 is that it the global move in not being
driven by the US.  
that here in January, the US 10-year
yield is up eight basis points.  The German 10-year yield 27 bp, France is
up 30  bp, and the UK is up 26 bp.
  Similarly, at the two-year tenor,
the US yield is up five basis points this year, while German two-year yield is
up 16 bp, France 22 and the UK 15 bp.  

We want to be
sensitive to the possibility that the drivers of the dollar change.
  However, we are not convinced that this is
the case.  The correction to US interest rates began the day after the
FOMC hiked rates on December 14.  Solid growth in the US and rising
inflation expectations will underpin US yields and allow the dollar to recover
when the correction is over.  Our work with technical indicators suggests that turn nearby.  


Are Interest Rates No Longer Driving the Dollar?
Are Interest Rates No Longer Driving the Dollar?

Reviewed by Marc Chandler

January 26, 2017

Rating: 5

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