The Fed wasn’t in any hurry to hike rates or taper its bond purchase program in March, as was broadly expected. While bad news for longer-dated bonds, we believe this still puts the Fed in a more hawkish camp when compared to its peers such as ECB or RBA which are promising to become even more aggressive. As the Fed seems “hands off” for now with regards to US 10y Treasury bonds, then we would argue this is good news for the dollar. The twin deficit idea can be boiled down to that either i) US yields needs to rise, or ii) the USD needs to weaken so as to attract enough foreign funding of the US budget and current deficits. It thus follows that higher US yields means less downside pressure for the dollar.

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