Source: Zhitong Finance App

Prior to the release of key US employment data on Friday, the exchange rate of the US dollar against all major currencies declined, but foreign exchange strategists generally said that shorting the US dollar is still very dangerous, and the duration of this downward trend may be extremely short. The one that measures the dollar against a basket of currencies$USD (USDindex.FX)$After climbing to the highest point in 10 months on Wednesday, there was a decline for two consecutive days. The main logic is that long-term US Treasury yields temporarily declined after reaching their highest point since 2007 this week, weakening market demand for the US dollar and causing the dollar to fall. However, according to most strategists, the upward trend in the US dollar did not end there at least until the end of the year.

Rodrigo Catril, a strategist from the Sydney branch of the National Australia Bank, said: “We think the US dollar may enter a short break before the US government's non-farm payrolls data and other labor market data are released tomorrow.” “Another positive surprise is that we wouldn't be surprised if the US dollar index and 10-year US Treasury yields continue to test phased highs.”

Over the past six months or so, the US dollar has strengthened against the currencies of all Group of 10 (Group-of-10) member countries, with the Japanese yen and New Zealand dollar falling the most against the US dollar. As a sharp rise in the US dollar may increase imported inflationary pressure, countries such as Japan and South Korea have been seeking foreign exchange intervention measures to boost the value of the local currency.

Win Thin, head of global foreign exchange strategy from Brown Brothers Harriman & Co., wrote in a report to clients:”Leaving aside the noise of potential currency intervention, there has been no change in the logic of a strong dollar at all, and we see no reason to believe that the upward trend of the US dollar is over.” “Similar to last week's brief pullback trend, we think the brief weakening of the US dollar this week was essentially a technical adjustment.”

Even without the help of the hawkish Fed, this factor can support the upward trend in the US dollar!

In addition to the Fed's attitude towards monetary policy, there are still important factors that can support the trend of the US dollar index.This includes 10-year US Treasury yields. According to asset management giant AVM Capital, one of the strongest support logics supporting the US dollar is that under a high interest rate environment, US bond yields continue to stabilize at historically high levels.

Since various economic data, such as the ISM Service Industry Index and job vacancy data, show that the US economy is resilient, and expectations of a soft landing continue to heat up, the financial market is increasingly convinced that the Fed will maintain higher interest rates for a longer period of time, and the market is increasingly worried that neutral borrowing costs may rise sharply compared to levels after 2008.The yield on 10-year US Treasury bonds, known as the “risk-free yield weather vane,” continued to reach a new high since 2007. This largely suggests that the market's interest rate cut bets are gradually weakening; instead, the market expects interest rate levels to remain high for a long time.

According to some analysts, US Treasury yields may continue to remain near a high level. Mainly due to the resilience of the US economy, it is difficult for inflation to reach the 2% target set by the Federal Reserve. The market is increasingly convinced of the higher for longer trend. Coupled with the sharp expansion in the scale of US bond issuance compared to previous years this year, it will also stimulate full-term US bond yields to go online and remain stable at a high level.

Generally speaking, there is usually some degree of positive correlation between 10-year US Treasury yields and the US dollar. This means that when 10-year US Treasury yields rise, actual yields also tend to rise, and the US dollar exchange rate also rises, and vice versa. This relationship is mainly due to differences in yield due to interest rates and the impact of capital flows.

Specifically logically speaking,When a country's treasury-grade bond yields rise, that country's bonds become more attractive, attracting more inflows of capital from foreign investors. In order to buy these countries' bonds, foreign investors need to buy the country's currency, which will drive up the country's currency exchange rate.Therefore, when 10-year US Treasury yields rise or are at a high level in the US bond market, foreign investors may buy dollars to invest in US bonds, thereby driving up the US dollar exchange rate.

This wave of strength in the US dollar may continue until the end of the year and gradually subside in 2024

According to Bloomberg's survey of economists before the data was released on Friday, economists generally expect US employers to add about 170,000 employees in September, down from 187,000 last month. Some commentators say that the latest signs of a slowdown in US economic growth may lower US Treasury yields and limit the further upward trend of the US dollar.

However, Gareth Berry, a currency and interest rate strategist from Macquarie Group in Singapore, said that until the Fed may start cutting interest rates in 2024 to support the slowing US economy, the dollar will continue to appreciate against “almost everything” until the end of this year.He said, “The US dollar will continue to strengthen in the coming months. First, the reason is that the US economic growth performance is stronger than expected by economists, and then the dollar's eventual safe-haven nature.” “However, we expect that under the leadership of the Federal Reserve, major central banks will also start cutting interest rates. And the Fed is likely to take the lead in cutting interest rates, so the US dollar will be the first to experience a large-scale sell-off in 2024.”

According to a recent survey of forex strategists, the US dollar will continue to be strong until the end of the year, then begin to gradually decline in 2024. In a recent survey conducted by Reuters, up to 81% of surveyed strategists expect the US dollar to continue to rise for the rest of the year.

Jane Foley, head of foreign exchange strategy at Rabobank (Rabobank), said in September: “We think the strength of the US dollar will continue and will continue for the next 3 months or so.”

Ashvin Murthy, chief investment officer of hedge fund AVM Capital Pte in Singapore, said:”We expect the global financial environment to continue to tighten against the backdrop of continued high US bond yields, and multiple factors will prompt a comprehensive rebound in the US dollar over the next few months.”

However, according to the median estimate of most foreign exchange strategists, the US dollar will weaken moderately against major currencies within a year. Most of these strategists believe that the gradual weakening of the US dollar will occur next year, mainly because strategists expect the Fed to cut interest rates for the first time around the second quarter of next year.

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