Dollar index slips as US treasury yields rise to a 12-month high

The US dollar index (DXY) tumbled today as US treasury yields continued rising signaling higher inflation hopes ahead. The index is trading at $90.63.

Disappointing US data

Yesterday, the Bureau of Labour Statistics published relatively strong US retail sales numbers. In total, the headline and core retail sales rose by more than 5% in January because of the $900 billion stimulus.

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However, data released today were relatively mixed. The US housing starts declined by 6.0% in January after rising by 8.2% in December. In total, the number of housing starts fell from 1.68 million to 1.58 million. 

In the same period, the number of building permits increased by 10.4% from 1.7 million to 1.8 million. This was a better performance than the median estimate of 1.678 million.

Meanwhile, the dollar index also reacted to the relatively weak jobless claims numbers. In total, more than 861,000 people filed for initial jobless claims last week. This was higher than the median estimate of 765,000 and the previous month’s increase of 848,000. Further, the number of continuing jobless claims fell to 4.49 million. 

These numbers are putting pressure on Congress to do more to stimulate the economy. In fact, Congress is deliberating on how to structure the proposed $1.9 trillion stimulus package. 

Such a deal will likely lead to more inflation, which will call on the Fed to tighten faster than expected. In fact, as shown below, the yields on the ten-year and 5-year government bonds have risen to the highest level since February last year.

The dollar has declined by 0.90% against the British pound, 0.40% against the euro, and 0.30% against the Swedish krona. It has also fallen by 0.40% against the Australian dollar and by 0.30% against the Brazilian real.

US dollar index forecast

On the four-hour chart, we see that the dollar index declined sharply today after it reached the 23.6% Fibonacci retracement level at $91.03. The index also declined below the first support of the Andrews Pitchfork indicator and the 15-day and weighted moving averages. It also fell below the Ichimoku cloud. Therefore, in the near term, the US dollar index will likely remain on the defensive. In fact, it may move below $90 as bears target the year-to-date low of $89.22.