USD: Bond yield divergence to favour the dollar – CE

Analysts at Capital Economics expect that higher government bond yields in the US than in other developed markets (DMs) will push the US dollar up, as has generally been the case since the Global Financial Crisis.

Key Quotes:

“Our economic forecasts suggest that growth in the US will rise to its highest level since 2001 relative to growth in the rest of the world. nd minutes from the Fed’s March meeting reinforce our assumption that it will not try to anchor long-term yields in the way that the ECB and BoJ do. As a consequence, we expect the yield gap between the US and other DMs will continue to widen, and drive further gains in the dollar against most DM currencies.”

“We think it will fare particularly well against the euro, yen, and the Swiss franc, as these currencies face weaker economic growth prospects, persistently low inflation, and more active central bank management of long-term government bond yields.”