The below chart appeared in the latest edition of the Weekly Macro Themes (VIEW LINK) and shows the well known US Dollar Index (or DXY) vs the average 10-year government bond yield differential across the G10 currencies. There appears to be a pretty clear relationship between the interest differential indicator and the level/direction of the US dollar index. You would expect this for a number of reasons e.g. US yields are relatively more attractive and thus encourage demand for US dollar assets, but also 10-year bond yields tend to reflect expectations around monetary policy and economic growth. The key point is that at present it looks to be pointing to an even stronger US dollar. So while on our measures it's starting to look slightly overvalued and overhyped (positioning and sentiment), the yield support demonstrated in this chart could provide basis for follow-through on the breakout.


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