US real yields stay high, US dollar refuses to follow

USD: US real yields rise, US dollar refuses to follow

The latest price action reinforces that Wednesday’s buyback rally did not address the forces lifting the term premium and long-end real yields. Yesterday, the 30-year yield partially retraced its announcement-driven decline, while global yields and energy prices also rebounded. Treasury can improve liquidity in selected long-dated securities, but it cannot remove the heavy duration supply, firm nominal growth and inflation uncertainty behind the selloff. The decision to at least double long-end buybacks beginning September 9 provided temporary relief, but Treasury’s best hope is that the program can establish a durable ceiling for yields.

The dollar’s muted response is more revealing than the renewed rise in yields. The chart below shows the increase in the US 10-year real yield from its 18-month minimum climbing to roughly 70 basis points, above its post-2016 average of 58 basis points, while DXY remains near 99. In earlier episodes, especially in 2018 and 2022, a comparable real-yield impulse was accompanied by a much stronger dollar. Since 2025, that relationship has weakened as repeated policy interventions, shifting communication and direct efforts to contain financial conditions have made higher Treasury yields a less reliable expression of superior US growth or monetary policy credibility.

This divergence points to a growing policy premium around the dollar. Higher real yields normally improve the relative return on US assets, but the currency response depends on why yields are rising. When yields rise because US growth is outperforming and the Fed is becoming more restrictive than its peers, the dollar usually benefits. When yields rise alongside heavier duration supply, energy-driven inflation risk and attempts by Treasury to manage the long end, part of the increase represents compensation for uncertainty rather than an improvement in the dollar’s underlying appeal. The July FOMC minutes indicated that the earlier rise in Treasury yields was driven largely by real rates and a more restrictive expected Fed path, but the subsequent buyback announcement blurred that otherwise supportive signal.

That leaves the dollar carrying more of the adjustment burden. The renewed rise in real yields may establish a firmer floor under the greenback, particularly if US rates continue to outperform foreign yields, but the chart argues against expecting the usual upside response. Each policy effort to restrain borrowing costs creates further uncertainty over how far policymakers will allow market rates to rise, reducing the informational value of the Treasury curve and encouraging investors to demand compensation elsewhere.

Until higher US real yields are again associated with a consistent policy framework rather than recurring intervention, the dollar is likely to remain subdued relative to the level of yields. That persistent gap is becoming one of the clearest market expressions of the US policy premium. At the same time, expect short-term gold and other non-yielding assets to benefit from the lack of dollar appeal.

CAD: Rally faces tariff deadline test

The Canadian dollar remains near cycle highs after a week of supportive economic data and improving trade sentiment. June retail sales rose 0.6% month over month, beating expectations, while ex-auto sales increased 0.5% and prior months were revised higher. Q2 retail sales climbed 2.2%, the strongest quarterly gain since late 2024, highlighting solid consumer momentum through the spring. The only soft spot was Statistics Canada’s preliminary July estimate, which pointed to a 0.8% decline, largely reflecting weaker gasoline-related spending.

Even with that softer July signal, the broader macro backdrop remains constructive for CAD. Since July 1, stronger employment, firmer inflation, and upgraded growth forecasts have helped drive a 3.3% decline in USD/CAD. Markets have also responded to narrowing US-Canada rate differentials, with Canadian yields rising as investors price in a gradual return to Bank of Canada policy normalization. Adding to the support, US Treasury buybacks and reduced expectations for additional Fed tightening have weighed on the US dollar more broadly.

Trade developments have provided another tailwind. Signs of progress in US-Canada negotiations have helped push USD/CAD to a fresh cycle low of 1.3741, with markets increasingly pricing in a deal before the tariff deadline. Technical momentum also favors the loonie after the pair broke below several key support levels over the past seven weeks. Still, the near-term outlook hinges on the trade outcome, with a finalized agreement potentially opening the door to further CAD gains.

MXN: Peso strength faces weekend test

The Mexican peso is trading at a fresh 52 week low for USD/MXN of 16.894, up 3.8% from the July 8 peak of 17.579 and its strongest level since May 2024. Markets are balancing two opposing geopolitical developments: the Trump administration’s planned escalation of sanctions on Iran and a notable diplomatic signal from Iranian President Pezeshkian, who suggested it may be time to end the conflict. Brent crude near $94/bbl reflects concerns about supply disruptions and the prospect of tougher sanctions, with details due Monday. At the same time, the prospect of renewed diplomacy has helped limit risk aversion and allowed MXN to hold close to its recent highs.

The peso’s resilience continues to be anchored by its carry advantage. Mexico’s 2 year yield of 7.19% offers a roughly 301bp premium over the US equivalent, while the 10 year spread stands near 452bp, supporting ongoing demand for Mexican fixed income. The backdrop has become even more favorable as softer Fed expectations and US Treasury buybacks have eased pressure on US yields, while Banxico’s 6.50% policy rate and a delayed inflation target timeline point to a prolonged period of relatively high rates. Against that backdrop, USD/MXN is down 5.9% year to date, extending the peso’s position as one of the strongest-performing emerging market currencies.

Technical momentum remains firmly in the peso’s favor after USD/MXN broke through multiple support levels and printed a new 52 week low at 16.894. The next key area is 16.80, with a move below that zone opening the door to 16.60 to 16.70. Still, elevated implied volatility and crowded long peso positioning leave the currency exposed to headline risk. Monday’s Iran sanctions announcement, the Canada tariff deadline, and any follow-through on Iran’s peace overture will shape sentiment heading into next week, making risk management particularly important despite the peso’s strong trend.

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Calendar: August 17 – 21

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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.