【TMGM Financial Recap】The US Dollar Hits a One-and-a-Half-Year High: While Rate Hike Expectations Are Fading, the Dollar Is Rising

In September, only 29,000 new nonfarm jobs were added, less than one-third of the expected 90,000, and the unemployment rate rose to 4.2%. While the reasons for rate hikes are decreasing, the US dollar is growing stronger.

On October 7, during trading, the 10-year Treasury yield briefly rose to 5.368%, the highest since April 2002; The 30-year yield reached a peak of 5.735%, the highest since May 2002. But on that day, a $39 billion 10-year Treasury auction delivered an unexpected answer: the winning rate was 5.30%, with a call ratio of 2.77 times, the strongest since 2016; At the close, the 10-year yield actually fell back to 5.28%. Real funds willing to buy long-term Treasuries above 5% are not forced by underwriters.

Inflation is pushing yields upward for a long time. Brent crude holds above $100, energy costs hold up overall prices, causing bond investors to demand higher returns and lock their money in long-term terms; A New York Fed survey shows that in September, consumers' median inflation expectations for the coming year rose to 3.9%, the highest since May 2023. As yields rise, returns on dollar assets increase, naturally attracting funds.

Unlike previous instances where "Fed raises rates → dollar rises," this round focuses on long-term yields rather than policy rates, which can fall as expected, and the inflation and fiscal deficits behind the former won't disappear on their own in the short term. The cost is already crowded positions: as of September 22, net long positions in the dollar tripled in just one month.

The Other Half Relies On Peers To Set Off The Spotlight

In the US dollar index, the euro weighs more than half, while it fell about 3% this month, closing at $1.1198 on October 7. The euro is not dragged down by the US, but by France: on that day, France's 10-year government bond yield surged 11.9 basis points to 4.8696%, Germany remained flat at 3.48%, and the spread widened to about 139 basis points; A few days ago, this spread briefly exceeded 150 basis points, the largest since the Eurozone debt crisis at the end of 2011.

France's financing costs are now higher than Italy's, which was once a representative of fiscal risks in the Eurozone. The reason is debt: France's public debt accounts for about 119% of GDP, with a deficit ratio of 5.4%. With the 2027 election approaching, it is difficult for factions to reach consensus on deficit reduction; Moody's will review France's ratings on October 23 and S&P in November.

So this round of dollar strength is partly because it holds its ground, and partly because the euro has fallen significantly. If the dollar is strengthening across the board, then all currencies should depreciate against the dollar. But that's not the case.

On October 7, the dollar was trading at 157.96 against the Japanese yen, with the yen rising slightly by 0.09%, the only major currency to strengthen against the dollar that day. Support comes from the Bank of Japan: New Policy Committee member Ayano Sato expressed support for phased rate hikes; she was previously one of two members who voted against a rate hike in September.

The RMB remained stable. The central parity rate for the day was 6.7351, up 60 basis points from September 30. Both onshore and offshore were around 6.70, with a very small price difference, indicating no divergence in RMB pricing between domestic and foreign markets.

The ones truly suppressed are currencies that have no room for rate hikes and rely on imported energy. The Indian rupee fell to 96.475 rupees per US dollar that day, hitting a more than two-month low. Even though the Reserve Bank of India raised its benchmark interest rate by 25 basis points to 5.50% on the same day—the first rate hike since February 2023—it still couldn't stop the decline.

Tonight, $22 billion in 30-year Treasury bonds will be auctioned and $6 billion will be repurchased. Whether long-term buyers are willing to continue buying at high levels is the most direct test of this rally. Looking ahead, on October 23, Moody's reviewed France's rating; on October 28, the Federal Reserve will make a rate decision; and in November, S&P will also assess France. Any change in judgment on French fiscal or US inflation at any point will be transmitted through interest rate differentials. So, to summarize simply: whether the dollar can hold its current high depends on when concerns over eurozone fiscal policy ease, and how long long-term US Treasury yields can stay above 5%.