The dollar has been the frontrunner in the last few months and it owes much to a rout in the bond market. Soaring Treasury yields alongside a more robust economy helped to provide the necessary tailwind for the dollar to outperform its peers. But now, are we poised for a reversal and a stop to the higher rates for longer narrative?
Bill Ackman, Bill Gross, and now Jeffrey Gundlach certainly think so at least. And if so, how will that play out for the dollar?
In recent months, the greenback has relied a lot on the factors above. But if there is to be a squeeze in the bond market or a potential reversal, odds are it is going to be doubly painful for the dollar on the way down.
For one, yields retracing is already a setback. But when you throw in the likelihood of equities finding comfort in that and rallying, a more positive risk mood will double up as a one-two punch against the dollar.
As for trying to read the temperature and severity of such a market move, a lot of that will come down to the US economic data climate.
Considering the market positioning, any sense of weakness in US data is going to lend itself to a further squeeze and that will initiate more hurt on the dollar in the meantime. But if US data continues to hold up well, that would allow the Fed keep its current outlook at least although it heightens the possibility for a soft landing.
And so, for dollar bulls, they’d better be praying for the latter while hoping for inflation to remain more sticky. Otherwise, the dollar might find itself in a lose-lose position no matter the outcome as a soft(er) landing will also be a welcome development for risk assets in general.