DBS Group Research economist Philip Wee says the US dollar’s recent resilience is mainly linked to higher-for-longer US yields, not to stronger underlying fundamentals. He connects higher Treasury yields to worries about long-term inflation expectations, fiscal funding pressures, and tensions near the Strait of Hormuz.
US Treasury 10-year and 30-year yields rose above 4.50% and 5.00%, respectively. This was described as a warning of long-term inflation expectations becoming less anchored.
Dollar Strength Driven By Yields
Since Operation Epic Fury began, futures markets moved from pricing Federal Reserve rate cuts this year to pricing a rate rise in late 2026. The dollar has been supported by the yield advantage created by this shift.
A plan associated with Warsh to reduce the Fed balance sheet is set against the Treasury’s need to issue debt to fund the fiscal deficit. The deficit is also described as being under pressure from US Supreme Court and trade court rulings against Trump’s global tariffs, plus an additional defence bill linked to the Iran conflict.
The administration is described as seeking to reassure bond markets that the current inflation pulse will pass. The text also refers to the risk of non-OPEC supply entering the market as alternative oil routes develop.
We see the US Dollar’s current strength as a temporary illusion, propped up by high US Treasury yields rather than solid economic health. The 10-year yield is staying above 4.50% because of persistent worries about long-term inflation and government funding, not because the economy is booming. This makes leveraged long-dollar positions increasingly risky over the next few weeks.
The April 2026 inflation report, which showed core CPI at a stubborn 3.9%, has reinforced the market’s expectation for higher-for-longer interest rates. This is a dramatic change from late 2025 when we were all anticipating rate cuts. Derivative markets are now pricing a non-trivial chance of a rate hike later this year, but this entire structure could collapse if the inflation narrative changes.
Geopolitics Oil And Inflation
Geopolitical tensions from “Operation Epic Fury” are keeping oil prices elevated, with Brent crude futures consistently trading above $95 a barrel. Any hint of successful back-channel diplomacy with Iran could trigger a rapid sell-off in oil, easing inflation fears and pulling the rug out from under the dollar. Traders might consider buying out-of-the-money put options on oil futures as a low-cost way to position for a sudden de-escalation.
We are also watching the government’s ability to fund its massive deficit, a problem made worse by last year’s court rulings against global tariffs and the new defense spending. The Treasury is scheduled to auction another $135 billion in bonds next week, and a repeat of last month’s weak demand could cause yields to spike uncontrollably, shaking confidence in the dollar. This underlying fragility suggests that options betting on higher volatility in currency pairs like USD/JPY are warranted.
The government is actively trying to convince markets that new oil supplies from non-OPEC nations will soon flood the market, making the current inflation spike temporary. If this massive new supply, estimated at over 1.5 million barrels per day, does hit the market as projected in the third quarter, yields could fall and the dollar’s main pillar of support would disappear. We believe positioning for a weaker dollar in the medium term, perhaps using call options on currencies like the Swiss Franc or Euro, is a prudent strategy.
