US dollar stays dormant amid surging short-term yields

The US dollar seems set to end the week broadly unchanged against most major currencies despite a favourable shift in government bond yield differentials. While we suspect there is limited scope for a further rise in short-term US Treasury yields, our view remains that sustained cyclical price pressures in the US – reinforced by the latest inflation data – and the Fed’s intention to tighten financial conditions will push up long-term yields there and, before long, underpin new post-crisis highs in the trade-weighted dollar.