US Dollar Steadies on Firm Treasury Yields Despite Debt Ceiling Risks. Higher USD?

USD, DXY Index, USD, Debt Ceiling, Volatility, VIX, MOVE, OVX, GVZ – Talking Points

• the U.S. dollar He got some support as debt ceiling talks continued
• Treasury yields have been rising and could support American dollar amid uncertainty
• While volatility is in check, for the time being, risks of events that could hit DXY may be growing

The US dollar found a firmer basis through Wednesday even though US debt talks stalled on Tuesday.

The T-Bill market is showing some nervousness over the so-called X-date that Treasury Department Janet Yellen has set to be June 1st. She said that the Treasury Department on that day may not be able to meet all of its financial obligations.

The spread between bills of exchange due 30th May and 6th June usually trades within a few basis points of each other. There is currently about 400 basis points spread between short-term US government debt securities.

Conversely, the broader markets don’t seem to be very interested in measures of volatility across US stocks, bonds, gold and oil remaining rather muted as seen below. Not surprisingly, bond volatility is only slightly higher compared to other markets but overall, currently benign compared to recent events.

Cross Market Volatility Indicators – VIX, MOVE, OVX, GVZ

Chart created in TradingView

Obviously, the collapse of the Silicon Valley Financial Bank (SVB) caused more anxiety in the financial markets as evidenced by the sharp rise in volatility at that time.

Treasury yields have held steady so far this week although they eased slightly early Wednesday. Overall, they have recovered from the lows seen earlier this month across the curve and all periods are now at the highest levels since the SVB collapse.

The two-year benchmark reached more than 4.40% yesterday before retreating after trading as low as 3.66% earlier this month. Similarly, the 10-year note fell 3.76% after touching 3.30% a few weeks ago.

The correlation between the DXY (US Dollar) and the Treasury yield is evident in the chart below.

Looking at the chart above and below, it appears that the price action around the collapse of the SVB and the growing concern surrounding the US debt ceiling are patterns.

In times of crisis and uncertainty, correlations in financial markets tend to trend towards 1 and -1 as the need to cover risk seems to outweigh the need to add risk.

For the US dollar, a US debt default could be a catastrophic event that could lead to a breakdown in market relations.

Historically, the US dollar was mostly seen as a haven in times of turmoil. If the United States is the epicenter of financial market chaos, these relationships may be called into question.

US dollar (DXY), US 2 cents and 10 US cents

– By Daniel McCarthy, Strategist for DailyFX.com

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