SPY - U.S. Dollar Gets Even Stronger As Long-Term Yields In The U.S. Rise

2023-10-03 11:05:53 ET

Summary

• The U.S. dollar cost of a Euro falls below $1.0500 again.
• The yield on the 10-year U.S. Treasury note reaches a 16-year high.
• World investors move to the United States as other major currencies and emerging market currencies tank.
• It seems as if the efforts of the Federal Reserve System to fight inflation have shifted the relative structure of world markets.
• It would not be unexpected, in such an environment, to see the value of the dollar grow even stronger and longer-term interest rates to rise even further.

The U.S. dollar cost of a euro (EUR:USD) dropped below $1.0500 again today.

Yes, the U.S. dollar dropped below $1.0500 in December 2022, but doubts had crept into the fact that the dollar was trading so strongly.

However, we are back in a period of time where many, many investors see the U.S. dollar as the place to be.

In fact, one can contend that the strength in the value of the U.S. dollar began at an earlier date… January 6, 2021. Yes, that is the date of the riot at the capital in Washington, D.C.

But, the fact is that the value of the U.S. dollar had been getting weaker before that date, and, from that date on, the value of the dollar fell relatively constantly into October 2022.

Basically, however, one can make a very strong argument that the world looks positively on the United States and the efforts that the Federal Reserve is making to combat inflation. At least, the efforts of the Federal Reserve have been seen as much more combative than other central banks around the world.

Yes, there was the back-off that started in the fall of 2022 due to investor concern that maybe Chairman Jay Powell at the Federal Reserve was not going to "stick to" the effort and ease up, but that concern seems to have faded into the past.

Now, the investment community seems to be with Mr. Powell and believes that the Federal Reserve will show more effort to reach the Fed's goal of a 2.00 percent inflation rate than other central banks.

One of the signs of how investors in the financial markets are thinking is the yield on the 10-year U.S. government (US10Y). On Monday, October 2, 2023, the yield on the 10-year U.S. Treasury note closed at 4.68 percent.

Note that the yield on the 10-year U.S. Treasury note has not been this high since October 12, 2007, just before the start of the Great Recession.

The yields on U.S. Treasury securities are at or near the highest in the developed world.

These yields and the belief that the Federal Reserve is going to continue to maintain its policy rate of interest at the high level it now stands for some further extended period of time have led world investors to bring relative world yields to where they are now.

This movement has brought additional pressure on the U.S. stock market, keeping stock prices down.

The Future

Most investors are now seeing a future where the actions of the Federal Reserve will now bring on continued high bond yields...and a stronger value to the U.S. dollar.

Other countries may not like this, but this seems to be the position that we have moved into.

Can the yield on the 10-year U.S. Treasury note reach 5.00 percent?

There are quite a few investors who believe that this is not an unrealistic picture.

Can the U.S. dollar cost of the Euro drop to $1.000 or below?

There are also quite a few investors that seriously believe that this can happen.

Others say that the world is really mixed up and everything seems to be a little...or a lot...out-of-line with reality.

The soundest bet seems to be on higher long-term yields and a stronger U.S. dollar.

Are you prepared?

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