15.11.202109:15 Forex Analysis & Reviews: Increase in government bond yields and rates will affect the US dollar's dynamics

The main topic for the US dollar is the possibility of raising rates and experts believe it is just a matter of time. The second most important is the balance of liquidity in the US stock market, which affects the dynamics of the US dollar.

The US currency showed sharp growth last week, and this trend continues. Today, it was trading near a 16-month high, slightly losing its position. Against this background, the previously fallen euro gained 0.13%, reaching the level of 1.1457. This morning, the EUR/USD pair remained in the range of 1.1456-1.1457.

It should be noted that a slight decrease in the USD was facilitated by market expectations about the Fed's possible interest rate hike. Experts have not ignored this hot issue. According to economists of the reputable bank Morgan Stanley, the regulator will not raise rates until 2023. According to experts' forecasts, the Fed will complete the purchase of assets by the middle of 2022, and the rate hike is possible only in a year. Morgan Stanley analysts are optimistic about the near future. They expect a reduction in the rate of inflation in the United States, a steady rise in the US labor market, and economic growth of 4.6% by the end of next year.

However, there is a difference of opinion within such a large structure as Morgan Stanley Bank. Its head, James Gorman, does not agree with the calculations of the department's economists. Last month, the head of the bank stressed that the current cost of money is too low, and this will force the Fed to take measures in the first quarter of 2022. According to analysts at Bloomberg, the estimates of J. Gormon sometimes differ from economists' forecasts, but they are the most accurate.

The calculations of the head of Morgan Stanley reflect the changing market expectations about rates. The change in investor mood occurred after the Fed's September meeting. It can be recalled that the regulator has demonstrated a "hawkish" position, which it adheres to this day. In view of this, futures for the federal funds rate (December 2022) declined by 0.5% – from the previous 99.55 to 99.05. Experts said that it will increase by 0.7% by the end of next year, that is, three full increases of 0.25% are expected.

Analysts believe that the current situation is destabilizing the US dollar. Last Wednesday, the growth of this currency resumed. The reason for this is the expansion of the yield spreads of American and European government bonds. According to experts, the US currency will rise in price in case of deterioration of liquidity in the US government bond market. The growth of US government bond yields is facilitated by the reassessment of market expectations about the Fed's further actions. Meanwhile, the question of the interest rate hangs over the market.

The situation with the yield of treasuries worsens the situation, which can collapse at any time. The catalyst for the decline in the liquidity of the treasury market was the beginning of a reduction in the asset purchase program by the Fed. A decrease in liquidity contributes to an increase in volatility, and this leads to a further increase in the profitability of US government bonds. Experts concluded that the implementation of such a scenario provokes further strengthening of the USD.

This week, an important economic event affecting the US dollar's dynamics will be data on retail sales in the United States. The publication of the reports is scheduled for Tuesday, November 16. Experts are afraid of a falling market because American consumer confidence unexpectedly fell to a ten-year low at the beginning of the month. The reason for this was high inflation, which turned the markets upside down and forced them to rethink the current situation.