Yields Bring Dollar Back

The dollar recovered slightly at the start of week’s trade aided by continuing rise in US yields which broke the 2.70% barrier on the benchmark 10-year for the first time since 2014.

The rise is the buck was modest given the massive yield differential that US now commands, but nevertheless, it was the first time in weeks that the correlation between fixed income and FX was working, suggesting that the greenback may be finding some sort of near-term bottom.

After last week wild volatility punctuated by a series of conflicting statements out of Davos, the currency markets are likely to settle down a bit and focus on the more mundane aspects of the economic calendar.

There was no data in Asia or Europe today, but FX traders will keen to see US PCE and Personal Income reports due at 8:30 NY time. The former will show if inflation has picked up at all, while the later will provide some valuable clues as to the state of the consumer.

Neither report is expected to exceed last month’s reading, but an upside surprise could just be the type of catalyst to spark a stronger short covering rally in the dollar. Meanwhile, the 109.00 level remains key resistance in USDJPY while 1.2400 is support for EURUSD. If North American desks decide to probe those barriers the short squeeze could accelerate fast.