Dollar Wobble to Worsen as European Yields Rise, Nomura Says

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The dollar risks losing one of its important supports as rising bond yields in Europe sap demand for American assets, according to Nomura Holdings Inc.

Benchmark 10-year Treasuries yield almost the smallest premium over German debt in six weeks, while similar-maturity Italian bonds yield the most since January. That’s reducing the incentive for investors to move money from Europe to the U.S., Jens Nordvig, Nomura’s New York-based managing director of currency research wrote in a report Tuesday. Nomura, Japan’s biggest brokerage, was the second-best forecaster of the dollar versus yen in the first quarter.

“This may have negative implications for global credit markets, and for the U.S. dollar,” Nordvig wrote. “We have been observing very elevated net fixed-income outflows since the summer of 2014. But this trend could be upset by the recent tension, at least temporarily.”

Sovereign-bond yields tumbled across the euro area this year as the European Central Bank embarked on a 1.1 trillion euro ($1.2 trillion) program of asset purchases -- including government debt -- to foster growth. Funds flowed out of the region in response, with much of that cash finding a home across the Atlantic, helping lift the dollar to its highest in at least a decade.

The greenback has since fallen 4.9 percent, as a run of weaker-than-forecast economic reports erodes the case for higher interest rates in the U.S. and the ECB’s stimulus starts to show results.

While traders cut bets on the currency’s strength to their lowest since October last week, further unwinding is possible, Nordvig wrote.

“The level of such positions remains fairly significant,” he wrote. “The combination of weakness in fixed-income and equities and a bounce in the euro is likely to be rather painful for many systematic traders. Hence, there could be a compounded effect on this yet ahead of us.”

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