The dollar held near three-month lows as strong PMI data and rising yields curbed selling. Goldman Sachs said slowing inflation is needed to lower yields, pushing capital toward gold and the yen.
The dollar hovered near three-month lows on Monday. A rebound in long-dated Treasury yields and stronger-than-expected PMI data reversed some of the selling pressure. Brent crude's rally and a drop in equity indices added support, traders said.
The dollar index edged up 0.2% to 101.5, after falling to a three-month low last week. Yields on 30-year bonds climbed back toward levels seen after the Treasury said it would raise the minimum purchase volume for its buyback program to $4 billion. The 10-year yield rose to 4.15%, up from 4.05% the previous week. The Japanese yen and Swiss franc, which had strengthened as the dollar fell, steadied in thin trading.
S&P Global's flash U.S. PMI rose to 56 in August, the highest reading since April 2022. The services gauge led the increase, signalling that the economy retains momentum even as manufacturing slows. Bloomberg economists followed by revising their third-quarter GDP forecast up to 2.5%, from 2%.
The strength in activity data has reduced the urgency for the Fed to cut rates aggressively. Goldman Sachs, which carries an Alpha Score of 52 on AlphaScala's proprietary scale, said the only way to meaningfully lower Treasury yields is to slow inflation, which would require a tighter stance from the Fed.
The bond market's repricing has shifted investor attention. Gold and Bitcoin have attracted inflows, a shift some market participants call a debasement trade.
In the forex market, the shift has disrupted carry trades. The yen and franc, typically used to fund such strategies, have strengthened. The franc's rally was sharp enough that the Swiss National Bank intervened, traders said. SNB Governing Board member Petra Tschudin told a conference that the central bank may introduce negative interest rates to keep inflation within its 0-2% target.
Fed policymakers are set to speak at the Jackson Hole symposium on Friday. Traders will watch for any signal on the rate path after the recent run of strong economic data.
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