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  • It was a flat day in the end for the DXY, despite risk-on in the stock market.
  • Pandemic nerves may have acted in support of the US dollar but falling real yields may hurt it.

The Trump to Biden administration went smoothly on Wednesday, with no sign of a repeat of the violence of two weeks ago that some had feared. That, combined with Tuesday’s calling from US Treasury Secretary nominee Janet Yellen for Congress to “go big” with the fiscal stimulus in the coming months seems to have underpinned risk appetite (major US equity indices embarked on a big Tech-driven surge to fresh all-time highs anyway), though the whole of the market did not conform to the upbeat tone of equity markets.

Indeed, by the end of US trade, crude oil markets had erased earlier gains and finished the day flat and the US dollar, which would normally sell off as stocks rise, was choppy and mixed. Indecision in these two assets was perhaps a symptom of nerves regarding the continued deterioration in the state of the global Covid-19 outbreak as the (northern hemisphere) winter months drag on; Germany and the Netherlands tightened lockdowns and UK deaths continue their alarming surge, while the Biden team is reportedly already alarmed that it might lose control over the pandemic before it even has a chance to try to fight it.

In the end, the Dollar Index (DXY) finished the day with very marginal losses just below 90.50, having swung between the 90.20s and 90.70s.

Fed stimulus here to stay and inflation on the way says bond market

While pandemic nerves might be keeping DXY supported, bond markets are suggesting that markets are unwinding bets that the Fed might prematurely withdraw monetary stimulus by tapering its asset purchases, a factor which seems likely to ultimately be a negative for the US dollar; real yields were under pressure on Wednesday, with the 10-year TIPS dropping about 2bps to below -1.05% and a test of recent all-time lows just under -1.1% insight. Meanwhile, break-even inflation expectations have also been on the rise, with the 10-year briefly crossing back above 2.1%. This all suggests that the markets expect 1) higher inflation moving forward as a result of stimulus and 2) that further fiscal stimulus likely under the Biden administration will not cause a tightening in financial conditions with the Fed there to soak up additional US government debt issuance in the secondary market.

DXY key levels