US FX WRAP: Dollar gains every day so far this week on monster yield rally
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US FX WRAP: Dollar gains every day so far this week on monster yield rally
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TREASURY WRAP: T-NOTE FUTURES (Z6) SETTLE 5+ TICKS LOWER AT 104-27+
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USD finished higher against its peers for a fourth consecutive day this week, again supported by continued inflation concerns as US yields and oil prices marched higher. Reports of US-Iran progress continue to surface; however, tangible progress is yet to be observed. The latest indication came via an Iranian official speaking to Reuters, who said a phased deal could see Iran resume free navigation through the Strait of Hormuz in exchange for the US lifting its blockade and potentially unfreezing Iranian assets. That said, the official described US demands as excessive and the likelihood of a diplomatic resolution as “extremely low”. Also casting doubt over diplomacy is the ongoing conflict between the Houthis and Saudis, with the former saying it struck Saudi Aramco facilities in Yanbu and a “sensitive target” in Riyadh.
Outside of geopolitics, Fed's Paulson, a 2026 voter, did not share the same conviction as some of her peers who have explicitly called for another 2026 rate hike, saying instead that another hike may be required to curb inflation. She added, however, that the best that can be said about inflation is that it has not worsened. Meanwhile, the continued move higher in US yields reflects persistent concerns around the inflation outlook and whether or not the Fed are behind the curve, although Thursday's long-end weakness was also influenced by Treasury supply dynamics. The 7yr note auction was met with weak demand, producing its largest tail since March, while the Treasury's 20-30yr liquidity-support buyback accepted just USD 4.08bln against the USD 6bln maximum announced on Wednesday. DXY hit highs of 101.398.
In Europe, it was a day of central bank rate decisions. The SNB held rates at 0.00% as expected, although it adjusted its FX intervention language, saying it remains “willing to be active in the foreign exchange market”, versus its previous “increased willingness” to intervene. EUR/CHF rose to around 0.9422 from the 0.9386 open.
The Riksbank held rates as expected, accompanied by hawkish commentary and rate projections. Meanwhile, the Norges Bank hiked rates by 25bps, with expectations split between a hold and a hike. EUR/SEK and EUR/NOK both traded modestly higher.
MXN was hit by Dollar strength, while there was little reaction to Banxico unanimously leaving rates unchanged. However, the central bank adjusted its guidance, saying future decisions will consider the ongoing disinflation process and the expected behaviour of its determinants, including exchange-rate pass-through to consumer prices, slack conditions and inflation expectations. Previously, Banxico had said the Governing Board estimated it would be appropriate to maintain the reference rate at its current level.
Multi-day dollar runs built on a rising US yield complex and higher oil are a familiar configuration, and in past episodes of this kind the driver that matters is whether the move is rate-led or risk-led: here the transmission is explicitly the rates channel, with the yield rally doing the work across the G10 complex rather than safe-haven demand, which tends to make the move broader and more persistent than a pure flight-to-quality bid. The composition of the rates move is the tell: long-end weakness tied to a poorly received intermediate auction and a soft buyback take-up points to term-premium and supply pressure rather than a clean repricing of the policy path, a distinction that has historically mattered for how durable the dollar leg proves. On the policy side, the split between officials openly entertaining another hike and those, like the voter quoted here, keeping it conditional is the usual pattern late in a hawkish cycle; the front end has tended to reprice only when the conditional language migrates toward the committee's centre. The European decisions fit the classic divergence template: an eased intervention bias from the SNB mechanically softens the franc floor, while a hawkish hold from the Riksbank and a split-decision hike from the Norges Bank delivered only modest Scandie outperformance, consistent with past episodes where local hikes are swamped by a dominant dollar trend. Worth watching next are the follow-through in auction demand at the long end, whether hike talk broadens among Fed speakers, and any concrete movement on the Hormuz track, since headline-driven oil reversals have historically been the fastest way to unwind this exact configuration.
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