There seems to be an ongoing struggle between reflationary trading and central banks trying to keep market optimism from becoming too significant, and in these circumstances, we can see that the dollar has proved to be more resilient than expected.
At present, the greenback is doing well due to several reasons.
First, Fed Chairman Jerome Powell's faith in the U.S. economy and its ability to withstand rising Treasury yields favors the U.S. dollar.
Second, higher yields in the U.S. make the dollar more attractive compared to its major competitors.
Third, the decline in stocks is forcing investors to seek refuge in USD.
Investors were waiting for Powell's assurances of his readiness to contain the growth of yields, however, they did not hear anything, which increased the pressure on the markets.
As a result, the U.S. stock indexes fell 1.1-2.1%, and the yield on 10-year US government bonds jumped to 1.58%, approaching the annual maximum of 1.61%, reached last week.
"Markets listen to central banks, and if the latter is going to leave things as they are for a long time, it means that long-term inflation will be higher, which is why you are seeing a sell-off in the bond and equity markets," said strategists at Commonwealth Bank of Australia.
Given the fact that there are a lot of short positions on US government securities, there is reason to believe that the downward movement in stocks and upward in bond yields is not over yet.
Over time, yields could rise to a level that would lead to a collapse in risk sentiment and a strong surge in the USD that the Fed will come to the rescue again, this time with control of the yield curve.
"We may see Operation Twist again if economic and financial market conditions deteriorate, but there are few signs of such deterioration," said Standard Chartered.
Moreover, according to experts, the Fed is unlikely to take any steps unless necessary, since the Central Bank's doctrine has always been: to achieve your goal with minimal effort.
Also, there has been a recent trend that reflects an improved economic outlook for the United States.
The Beige Book which contains a summary of the Fed's comments was released on Wednesday evening and showed that most of the twelve American states saw moderate growth in economic activity from January to mid-February. At the same time, most enterprises are generally optimistic about the next 6-12 months.
After Powell's comments, the dollar rose sharply. On Friday, the USD index reached a three-month high, climbing above 92.1 points.
The nearest strong resistance is located near 92.45 points (correction of the "bearish" course of 2020-2021) and further - at 92.90 points (at the level where the 200-day moving average passes). The breakdown of the last mark will cause the rise to the highs of November last year near 94.30 points.
"Market participants expected tougher rhetoric from the Fed, which was supposed to put an end to further growth in Treasury yields. However, we didn't hear that, so the dollar is growing in all directions in anticipation of a further increase in yields in the US," said analysts at Mizuho Bank.
"It is quite possible that the real profitability in the US will be higher. However, there is a level of profitability that will match the more optimistic outlook for economic growth. If bond yields stabilize for two or three weeks, the market will decide it's okay to live with it. Therefore, we are still pessimistic about the dollar, despite everything that is happening now in the markets," said Standard Chartered.
Experts admit that in the coming months or even weeks, the USD may begin to decline, which took place after the adoption of the first stimulus package for the U.S. economy in the middle of last year.
The fact is that this weekend, the U.S. authorities can approve a new antiquarian plan and throw trillions of dollars on the market. The growth of the money supply in the country promises a weakening of the U.S. dollar.
