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On the assumption that most G10 central banks have a preference for a weaker currency, the move higher in US bond yields is a gift for many of them. However, over the medium-term, economists at Rabobank expect real yields to exert more influence over relative exchange rates and potentially limit upside potential for the greenback vs. currencies such as the JPY.

Key quotes

“The flurry of market positioning that has driven the USD in the initial months of this year is likely to run out of steam in the months ahead. Currently neither US inflation expectations or nominal yields are particularly high when measured from a historical perspective. That said, the Fed can be expected to keep a close eye on the levels on both. While yields may push higher in the short-term and provide the USD with additional impetus, we see scope for pullbacks in the months ahead.”  

“The BoJ is likely quietly welcoming the move higher in USD/JPY given the loosening in monetary conditions that it implies. However, on the assumption that real yields remain contained, USD/JPY may also dip lower on a 3 to 6 month view.”