BNY strategist Geoff Yu highlights that rising European real yields are increasingly counterbalancing the traditional support for the US Dollar provided by higher US real rates [1]. According to Yu, the spread between US and European real rates has remained tight over the past six months, which has limited further upside for the Dollar [1]. He notes that while markets typically favor higher USD real rates, the stronger movement in European equivalents acts as a buffer against additional Dollar strength, particularly as safe-haven demand may have peaked [1].
Yu further observes that Dollar hedging has decreased due to haven interest, and he does not anticipate a return to the pre-conflict status quo [1]. He asserts that the Dollar currently lacks a compelling recovery case from either nominal or real rates [1]. The market is expected to wait for clarity on where real rates will settle, as the growth impact from the ongoing conflict becomes clearer over time [1].
CONCLUSION
The tight spread between US and European real rates is limiting the Dollar's upside, with European yields providing significant resistance to further Dollar strength. Market participants are likely to remain cautious and await further developments in real rates and the broader growth impact from the conflict.