Euro area government bond yields have increased by 51 basis points since the start of the year.
This rise is because of global policy changes that could bring large structural shifts in trade and financial flows.
These changes will in turn most likely strengthen the yen and euro in the near term as policy uncertainty in the U.S., slower growth and the possibility of a widening trade war leads to capital flows seeking to profit from those changes.
Interest rates in Germany in particular seem poised to move higher considering calls by the incoming chancellor, Josef Merz, for a significant increase in military and infrastructure spending that should kickstart an otherwise moribund economy.
Japanese government bonds are 42 basis points higher as inflation and growth finally come to the Japanese economy, allowing the monetary authorities to raise short-term interest rates above zero.
This has all occurred within a short time span when growing concerns about the U.S. economy have pushed U.S. 10-year Treasury bond yields 27 basis points lower.
The upshot is that diminished yield spreads are offering less support for the dollar against the euro and yen.
The dollar’s recent five-month appreciation versus the euro appears to have topped out, reversing the dollar’s move toward parity. The euro is now trading above 1.09.
The yen, which was trading at 157 at the end of last year, has appreciated to 148 against the dollar, with 10-year yields above 1.5% in the second week of March.
Read more of RSM’s insights on the economy and the middle market.
We expect Japan’s monetary authority to continue push its policy rate higher, allowing interest rates to normalize during this latest episode of increased growth and rising prices.
Recent trading suggests that the dollar, although still strong, appears to be more vulnerable than it has been over the past two to three years.
The consensus among traders is that the certainty regarding the U.S. economy and the dollar has been replaced by uncertainty.
