US Dollar: Momentum fades as yields stay high – MUFG

MUFG’s Lloyd Chan notes that the Dollar has extended its recent soft patch even as US Q3 GDP forecasts are upgraded to 2.5% annualized from 2.0%. Elevated fiscal deficits and long-end Treasury yields are weighing on sentiment. Speculative data still show a modest net long USD bias, but price action suggests fading Dollar upside momentum near key support levels.

Soft patch despite resilient US data

"The US dollar has lost further momentum and extended its recent soft patch. Recent market focus has shifted towards the policy implications of Treasury Secretary Scott Bessent's efforts to rein in the surge in long-end yields and the narrative of a possible debasement trade."

"While economists have upgraded US Q3 GDP growth forecasts to 2.5% annualized from 2.0%, supporting the narrative of continued US economic resilience, the dollar has struggled to benefit as markets weigh the longer-term implications of elevated fiscal deficits and long-end Treasury yields."

"The recent decline in the dollar has brought it near to key support levels. But US yields remain elevated, while speculative positioning data suggest investors continue to retain a modest net long USD bias."

"The divergence between relatively resilient USD positioning and weaker price action points more towards fading dollar upside momentum for now."

"It remains to be seen whether markets price in negative risk premium on the dollar, particularly with President Trump recently hitting 50% tariffs on about $20bn in Canadian goods (about 4-5% of Canada’s annual exports to US)."