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Dollar Down? The 10-Year Says “Yes!”

May 21, 2024

From the Desk of Ian Culley @IanCulley

Risk assets are enjoying record-breaking highs.

Dr. Copper, Papa Dow, and international equity indexes such as the FTSE 100 are making the new all-time highs list. And Bitcoin will likely join them as it climbs back above 70,000.

Yet the defiant dollar remains afloat.

Nevertheless, risk-seeking behavior, Emerging Market currencies, and interest rates imply the dollar will eventually sink.

Earlier this month, the US Treasury benchmark interest rate led the US Dollar Index $DXY in violating a year-to-date trendline. 

Here’s the US 10-year yield $TNX overlaid with DXY:

The dollar follows the same path as rates. Therefore, the US dollar should follow if the 10-year yield is posting a valid breakdown.

Plus, many of our bearish USD trades have triggered entries. The euro, pound, aussie, and kiwi are gaining on the dollar.

On the other hand, the loonie and yen have not. But Emerging Market currencies suggest they will. 

Check out the EM Currency ETF $CEW (inverted) with DXY at the top:

CEW is printing year-to-date highs (lows for the inverted chart). Meanwhile, dollar weakness is broadening.

At the end of last year, the EM currencies registered a new multi-year high while the US dollar Index failed to undercut its July low. The brief decoupling led to more range-bound action for both indexes.

Regardless, fresh six-month lows on the inverted CEW chart suggest a DXY trending toward 100, not 107.

Risk assets agree.

Investors are reaching for the riskiest precious metals instead of running to the dollar’s safety.

Notice the silver-to-gold ratio tends to peak and trough with EM currencies.

Toward the end of last year, investors weren’t interested in Silver as CEW hit new two-year highs.

Fast-forward to today, and CEW’s rally is met with an increased appetite for all things shiny — especially silver. The silver-to-gold ratio is ripping toward its highest level since 2022, and copper futures are skyrocketing to new all-time highs.

It’s not the environment we’d expect to witness a resilient dollar. But here we are.

Interest rates, EM currencies, and risk assets are all on the same page. Risk-on!

I think it’s simply a matter of time before the dollar falls.

What did I miss?

Are you bullish the dollar? And if so, why?

–Ian

Thanks for reading.

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