Last Friday, Federal Reserve Chairman Jerome Powell's speech at Jackson Hole could maintain the prospect of keeping U.S. interest rates and bond yields at a high level for an extended period, which is good news for investors bullish on the dollar, especially in contrast to the economic performance of other economies compared to the United States.
The latest assessment from the Atlanta Federal Reserve shows that the U.S. economy appears to be performing quite well, with an annual growth rate close to 6%. However, its main competitors, especially the Eurozone and China, are not faring as well.
Before Powell's keynote speech at the Jackson Hole meeting, the dollar had already reached a two-month high against a basket of major currencies. The widening gap between U.S. and other countries' bond yields has resulted in the dollar significantly outperforming the euro, the British pound, the Japanese yen, and the Chinese yuan, among most major currencies.
Currently, the two-year U.S. Treasury yield is over 200 basis points higher than the Eurobond yield, and the difference in yields between two-year U.S. and UK Treasuries has reached its largest in two and a half months. The difference in yields between two-year U.S. and Japanese government bonds has risen to a high not seen since 2000. Yung-Yu Ma, Chief Investment Officer at BMO Wealth Management, mentioned that the difference in government bond yields between the U.S. and other markets could support the dollar moving into a higher trading range.
Powell's speech at the Jackson Hole central bank annual conference can be summarized as follows: the condition for further tightening of monetary policy depends on the performance of economic data, considering the resilience shown by recent U.S. economic data. Powell's speech and economic data could be a "win-win" scenario that dollar investors look forward to. On one hand, the U.S. interest rate market has not yet reflected further tightening policy, and on the other hand, recent strong economic data supports the Federal Reserve's continued rate hikes.
Even if the Federal Reserve keeps interest rates unchanged within the year, the interest rate curves of the U.S., UK, and Eurozone show that the risk of economic downturn in continental Europe is much higher than in the U.S. If the latest Purchasing Managers' Index (PMI) is any guide, the PMI shows that economic activity in the Eurozone and the UK is rapidly shrinking. Should the global economy deteriorate, other major countries or economies could be more severely affected than the U.S., a situation that has occurred several times over the past decades.
Compared to China and Japan, the bullish outlook on U.S. interest rates may be more reasonable. Faced with deflation, a real estate industry crisis, and worsening economic sluggishness, the People's Bank of China (PBOC) is reluctantly being forced to cut interest rates and relax monetary policy, resulting in the largest gap in 10-year government bond yields between the U.S. and China since 2007.
While a yield difference of more than 500 basis points between U.S. and Japanese government bonds may prompt concern from Japanese authorities, adjustments to yield curve control (YCC) by the Bank of Japan, influenced by rising real interest rates in Japan and continuing inflation pressures, are causing the bottom line of the U.S.-Japan government bond yield gap to expand.
In the past six weeks, the dollar has risen by 5%, and the likelihood of a short-term decline or correction is increasing. However, as long as U.S. economic data remains strong or the U.S. Treasury yield continues to maintain a certain spread with other national bond yields, U.S. Treasury yields will continue to support the dollar's further rise.
