Deutsche Bank’s Macro Strategy report has a positive view of the US Dollar, supported by strong economic data. The ISM manufacturing index unexpectedly jumped, raising hopes for 2026. As a result, the Dollar Index increased by 0.66%, marking its best two-day performance since last spring.
US Treasury markets reacted strongly to the ISM data, with yields rising as the chances of Federal Reserve rate cuts decreased. Initially, futures indicated an 87% chance of a rate cut by the June FOMC meeting, but this dropped to 70% by the end of the session. The higher yields have helped boost the Dollar Index even further.
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The latest ISM manufacturing index unexpectedly rose to 52.3, the highest in over a year. This change should lead us to rethink expectations of a quick Federal Reserve policy shift. The chance of a rate cut by the June meeting has plummeted from over 85% to just below 70% in just two days. This significant shift indicates that the dollar is likely to gain strength.
The US Dollar remains strong, with the Dollar Index (DXY) now consistently above 105.5 for the first time since last November. This trend mirrors what happened in early 2024 when strong economic data caused the market to rethink aggressive rate cut expectations, driving a dollar rally. We should consider strategies that profit from a weaker Euro and Yen, like buying call options on USD/JPY.
Treasury Markets And Their Impact
The moves in Treasury markets show that yields have more potential to rise, with the 10-year note yield surpassing 4.35%. We should plan for this trend by thinking about buying puts on Treasury note futures or selling calls, as the market is adjusting to a more hawkish Fed stance. In 2023, we saw a similar situation where persistent inflation data kept pushing yields higher for months, even when many anticipated a policy shift.
We also need to monitor how this affects stocks, especially multinational companies that may see reduced foreign earnings due to a stronger dollar. Historically, a sustained 10% increase in the dollar can lower S&P 500 earnings by about 3%. Thus, buying protective puts on certain export-heavy sector ETFs might be a smart hedge. Additionally, a rising dollar and increased real yields may pose challenges for commodities like gold, which typically move opposite to the US currency.
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