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For Dollar Traders, the Most Important Signal Comes Roaring Back

  • Dollar’s strength tracks rising inflation-adjusted bond yields
  • Correlation between dollar and real yields highest since 2014
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Neuberger's Aka: Dollar Could Rise Another 4%-5% in 2017

Updated on

If you’re a dollar bull and you’re getting a little nervous about the sustainability of the greenback’s rip-roaring rally, take comfort in knowing that a fundamental gauge of the currency’s worth is on your side.

The barometer is the real-yield differential. Sounds esoteric, but at the heart of it is the interest earned on dollar-denominated fixed-rate assets, compared to those issued in other currencies, after adjusting for inflation expectations. U.S. real yields have more than doubled against Japan’s since the November presidential election. At the same time, the positive correlation between that gap and the dollar-yen exchange rate has strengthened to 0.5 from as low as 0.1 last year. (A reading of 1 means that gauges move in lockstep; minus 1 means they move in opposite directions.)