EUR/USD: Dollar drops as Treasury yields reverse initial surge to 5.00%

• 10-year Treasury tested 5.00% for the first time since 2007
• This latest bond market selloff could lead to a harder-hitting economic slowdown
• Strategists don’t believe the recent data support this bond market move; strong buying emerged once yields hit 5.00%

Wall Street is trying to understand how the US economy will be able to deliver a soft landing as Treasury yields trade at cycle highs. A fourth quarter slowdown is here but that is only happening from a high baseline, which will probably be around 4%.  A strong labor market and overall healthy consumer means the final quarter of the year will still see decent growth. ​

With the 10-year Treasury yield crossing the 5.00% level, it is clear that ‘higher for longer’ is here to stay. Yields are a few percentage points above the Fed’s target and that means parts of the economy are headed towards a recession.

The US dollar went on a rollercoaster ride this morning.  The dollar was initially stronger to the euro as the bond market selloff  was fueling credit concerns and as the risks grow for  a significant escalation with the Israel-Hamas war. Headlines however suggest an immediate escalation did not seem likely and some of those gains were reversed. The US advised Israel to delay the Gaza invasion as more deals are being negotiated.  The pentagon also announced that they have not seen a direct order from Iran or its proxies to increase attacks against US troops.

Over the weekend, inaction in the Middle East has led to some relief in the king dollar trade, but that might prove to be temporary.  Axios reported that “Top U.S. officials tell us the threats of a war widening from the Gaza Strip are real and rising.”  Some Israeli air strikes on Gaza have been reported earlier this morning. ​

As much of Wall Street strategists remain bearish on the euro, this overcrowded trade appears ripe to be getting squeezed out.  Major resistance lies just ahead of the 1.08 level.

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