Euro Vulnerable Against a Runaway US Dollar with Treasury Yields Jumping –


Euro, EUR/USD, US Dollar, Fed, FOMC, Treasury Yields, China, Debt Default- Talking Points

  • Euro bearishness appears intact for now as the US Dollar roars
  • The trend in EUR/USD remains in play but a break above 1.1000 could change that
  • If Treasury yields keep rising on official selling, will that sink EUR/USD?

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The Euro capitulation could be mostly attributed to a roaring US Dollar strengthing across the board of late.

Overnight the Federal Open Market Committee (FOMC) meeting minutes a more hawkish board than the market had pencilled in.

The messaging from several fed speakers over the past week has been a consistent mantra of keeping monetary policy tight for a long period. The minutes revealed that another hike might be in the offing if conditions warrant it.

The 1- and 2-year part of the interest rate market scaled back rate cut prospects by around 10 – 15 basis points this week.

Perhaps more importantly, further along the Treasury yield curve, there has been a parallel shift higher, underpinning the ‘big dollar’.

The benchmark 10-year bond is trading near 4.29%, a whisker away from the 4.33% seen in October last year, which was the highest return on that note since 2007.

The latest data on Treasury holdings for June revealed that China has been a consistent seller this year. The only month this year that they have been a buyer of US Government bonds was in March when the Yuan rallied significantly.

This week, the Yuan has been strengthening and it’s possible that China has again been selling US debt.

The market perception of the situation in the world’s second-largest economy has deteriorated this week despite the People’s Bank of China (PBOC) cutting its 1-year medium-term lending facility rate to 2.50% from 2.65%.

Country Garden and Sino Ocean, two very large property developers, have defaulted on several offshore and onshore bonds this month.

The concept of contagion entered the markets’ lexicon after Zhongrong International Trust Co., a major player in China’s trust sector, missed several obligations to its clients over the past week.

If this scenario continues to play out EUR/USD could see further downside.

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— Written by Daniel McCarthy, Strategist for

Please contact Daniel via @DanMcCarthyFX on Twitter


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