USD: Real yield backing limited by Europe – BNY

European Real Yields Dampen Dollar's Strength

According to BNY strategist Geoff Yu, the recent climb in European real yields is increasingly counterbalancing the Dollar’s usual advantage from higher US real interest rates. He points out that the gap between US and European real rates has remained narrow, which is restricting further gains for the Dollar. Yu also highlights that, at present, there is little justification for a significant Dollar rebound based on either nominal or real rates.

Limited Room for Dollar Appreciation

Yu observes that, although markets tend to favor higher US real rates, the stronger momentum in European real yields is acting as a barrier to additional Dollar appreciation—particularly now that safe-haven demand may have reached its peak.

He further explains that the difference between US and European real rates has stayed within a tight band over the past half year.

Yu also notes that some of the Dollar’s hedging appeal, previously driven by its haven status, has diminished, and he does not anticipate a return to pre-conflict dynamics.

Overall, the Dollar currently lacks the necessary rate-driven support for a broad-based recovery.

Yu concludes that investors are likely to remain cautious, waiting to see how real rates evolve as the economic consequences of the ongoing conflict become clearer.

(This article was produced with assistance from an AI tool and subsequently reviewed by an editor.)