Why the US dollar’s mini-revival won’t take the wind out of the yuan rally

The Fed’s policy to keep a lid on Treasury yields, to boost job creation and the economy, will weigh on the value of the US dollar because investors will rationally look for better returns elsewhere, notably China

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Shoppers walk through Macy’s flagship Herald Square store in New York on the most recent Black Friday, on November 27. There is every possibility that, as America emerges from the pandemic, US consumers will continue their love affair with Chinese goods. Photo: Bloomberg

Published: 1:30am, 20 Jan 2021Updated: 2:28am, 20 Jan 2021

Yuan bulls should remain calm. A sinking US dollar might have gained some relief last week on the back of an uptick in yields on the benchmark 10-year US Treasury note, but that respite is likely to prove short-lived. The greenback’s mini-revival rests on weak foundations, and economic circumstances still favour the renminbi.

On the US side of the equation, bond market practitioners know full well it is unthinkable that, in the middle of a still-raging coronavirus pandemic, the Federal Reserve would want markedly higher yields on the 10-year US Treasury. And the bond markets will be wary of taking on the US central bank.

“Don’t fight the Fed” is a long-established US bond market mantra. Nevertheless, it is undeniable that the 10-year Treasury closed on Friday yielding 1.085 per cent, and above 1 per cent for two weeks in succession for the first time since the first quarter of 2020.

It is equally undeniable that, at Friday’s close, the US dollar index had registered its largest weekly increase in more than two months.

Admittedly, the move in the yield on the benchmark 10-year Treasury is rational in a situation where coronavirus vaccine optimism has combined with a market realisation that the Democrats’ control of Congress will give the Biden administration more wiggle room to push through a massive fiscal stimulus package.

But it may be wishful thinking to expect either that the yield move will be sustained or that the US dollar can hold the ground it has regained on foreign exchanges.