US Dollar: Carry support persists on high yields

§ 01 Executive Snapshot

What: Elevated US yields and expectations of further Federal Reserve tightening are supporting the US Dollar.
Who: MUFG’s Lloyd Chan, Federal Reserve, US markets.
Why it matters: The strength of the US Dollar has implications for global trade, investment flows, and economic policy.

The 2-year yield is holding above 4%, while the 10-year yield has risen by nearly 20bps to around 4.57% month-to-date.
The US Dollar Index (DXY) is firming above the 99.00 level due to carry-driven demand.
The 4-week average of initial jobless claims remained low at around 202.5k as of mid-May.
The S&P Global US composite PMI steadied at 51.7 in May, indicating ongoing economic expansion.
Markets are pricing a higher probability of Federal Reserve tightening by year-end.

Historically, elevated yields have supported the US Dollar, making it more attractive to investors seeking return.
The ongoing discussions between the US and Iran regarding uranium stockpiles and the Strait of Hormuz are contributing to geopolitical risk, influencing market sentiment.

Immediate consequence includes strengthened US Dollar, which may lead to impacts on international trade dynamics and currency valuations.
Long-term implications may involve sustained investor confidence in US assets, affecting capital flows and economic policies.

Potential regulatory or geopolitical risks, particularly related to US-Iran negotiations, which could affect market stability.
Competition from other currencies may pose a risk to the Dollar's strength if yields in other regions rise significantly.

Watch for upcoming Federal Reserve meetings and statements that may indicate future monetary policy directions.
Monitor the US job market and macroeconomic data releases for signals of economic strength or weakness that could influence the Dollar's trajectory.