Many analysts have written about possible reasons for the divergence between the movement of 10-year US Treasury yields and the US dollar, with difficult US fiscal policy being a fairly straight-forward one. However, since this apparent decoupling began, markets have been wondering whether it was the unusual development, or whether the period before was the unusual one, when both variables moved in unison, Commerzbank's FX analyst Michael Pfister notes.

Correlation between changes in UST yields and USD is weak

"Since Liberation Day, there has been a weak correlation between changes in UST yields and the US dollar. You can basically see this in the first left chart as well. Although a gap has opened up, the movements since the divergence seem to be moving in harmony again to some extent. Therefore, the relationship has not completely disappeared; it has just become significantly weaker. Between July 2023 and Liberation Day, the relationship was quite pronounced."

"At that time, it was reasonable to argue that a rise in UST yields was accompanied by a stronger dollar. However, such an analysis ignores the actual causal relationship, which requires much more advanced methods than simple scatter plots. The key point is that the situation was very different in the 2010s before the pandemic. Even with the best will in the world, it was impossible to discern any relationship at that time; as an econometrician would say: the R² is practically 0."

"In short, the relationship between rising UST yields and a stronger US dollar does not appear to be as strong as the data from the nearly two years between July 2023 and Liberation Day suggests. This does not necessarily mean that the relationship does not exist. After all, there are good reasons why it did not work out in the 2010s. At that time, the USD appreciated significantly because the Fed was expected to normalise its monetary policy as one of the few Western central banks. In addition, the 'low inflation' equilibrium probably distorted yields. Therefore, it may be necessary to divide the data into different phases more clearly."