More Pain on Horizon for Dollar Bears Pummeled by Rising Yields 

Dollar bears are facing the possibility of being squeezed by more gains in the currency as higher Treasury yields and economic optimism fuel the greenback’s longest winning streak since early November.

The Bloomberg Dollar Spot Index on Monday touched the highest in more than three months. The move is an offshoot of surging Treasury yields, which are luring dollar buyers betting the Biden administration’s $1.9 trillion spending package will fuel economic growth that outpaces the U.S.’s major peers. In the options market, signs are also pointing to further greenback strength.

Dollar bulls are betting the rally has momentum amid the currency’s broad gains Monday: it touched a three-month high versus the euro, a seven-month high against the Swiss franc, and the highest since December versus China’s yuan. Meanwhile, The MSCI Inc. gauge of emerging-market currencies has been tumbling.

More Pain on Horizon for Dollar Bears Pummeled by Rising Yields 

“The USD move that started in earnest back on Thursday is extracting considerable pain among medium-term USD bears,” Deutsche Bank strategist Alan Ruskin said in a note. “The FX market is dealing with the USD-positive rates fall-out which is immediate, compared with any USD-negative news on external account deterioration that will only dribble out with a lag.”

Many traders are running to cover shorts. The dollar has been more resilient than expected this year. For one thing, the U.S. proved to be more adept in rolling out vaccines against the coronavirus relative to some European countries, and American economic figures are showing a recovery underway, with jobs growth in February beating estimates.

Although strategists had initially wagered that U.S. fiscal spending would pummel the currency, that expectation has been overshadowed by the strength of the domestic recovery.

“It would take a rather tortuous argument to conclude that 8-10% nominal GDP growth in the U.S. this year would lead to a weaker dollar,” said Stephen Jen, chief executive of Eurizon SLJ Capital. “The driving force behind the rise in the U.S. bond yields is a sharply superior economic outlook. This rally in the dollar has legs.”

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