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Higher US yields lift the dollar as bond sentiment turns weaker

MUFG links USD strength to a sell-off in US fixed income and points to a weak 5-year Treasury auction, with the 70 billion USD sale clearing at a 5.033% yield and a 2.21 bid-to-cover ratio.

Reported · Written up by our desk · Major Pairs

MUFG strategist Derek Halpenny says the US dollar is strengthening as US fixed income sells off, dragging on global bond sentiment and pushing yields higher across the curve, a dynamic he describes as consistent with a forced-selling or “pain trade” in markets.

He cited a poor 5-year Treasury auction as a key reinforcing factor for hawkish Fed expectations. The 5-year sale drew a 5.033% yield, the highest since June 2006, and a 2.21 bid-to-cover ratio, below the 6-month average of 2.33.

Halpenny also pointed to strong US and global PMIs for September, saying the manufacturing and services readings could encourage the Fed to maintain hawkish rhetoric. The global composite PMI rose to 58.4, the highest level since July 2021.

The note added that rising Brent oil prices and potential US diesel export bans could increase inflation risks, supporting the dollar while raising concerns about carry trades in a low FX volatility environment, where he says vulnerability to an unwind is elevated.

Latest closeBrent $97.67 ▼1.6%

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