Deutsche Bank’s Macro Strategy report forecasts a positive outlook for the US Dollar, bolstered by robust economic data. The ISM manufacturing index registered an unexpected surge, fuelling optimism for 2026. Consequently, the Dollar Index rose by 0.66%, experiencing its strongest two-day performance since the previous spring.
US Treasury markets displayed clear reactions to the ISM data, with yields moving higher as the likelihood of Federal Reserve rate cuts diminished. Futures previously suggested an 87% chance of a rate cut by the June FOMC meeting, reducing to 70% by the session’s end. Higher yields have further supported the Dollar Index, enhancing its gains.
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With the latest ISM manufacturing index unexpectedly jumping to 52.3, its highest reading in over a year, we should seriously reconsider bets on an imminent Fed pivot. The probability of a rate cut by the June meeting has dropped sharply from over 85% to just under 70% in two days, according to pricing in the futures market. This is a significant shift that suggests the path of least resistance for the dollar is higher.
This points to continued strength in the US Dollar, with the Dollar Index (DXY) now firmly above 105.5 for the first time since last November. This price action is very similar to what we saw in the first half of 2024, when persistently strong economic data forced the market to unwind its aggressive rate cut expectations, fueling a dollar rally. We should look at derivative strategies that benefit from a weaker Euro and Yen, such as buying call options on USD/JPY.
Treasury Markets And Their Impact
The move in Treasury markets indicates that yields have more room to climb, as the 10-year note yield has already broken above 4.35%. We should position for this trend by considering buying puts on Treasury note futures or selling calls, as the market is clearly repricing for a more hawkish Fed. Looking back to 2023, we saw a similar dynamic where stubborn inflation data kept pushing yields higher for months, even when many expected a pivot.
We also need to watch for the impact on equities, particularly for multinational corporations whose foreign earnings are hurt by a stronger dollar. Historically, a sustained 10% rise in the dollar can reduce S&P 500 earnings by as much as 3%, making protective puts on certain export-heavy sector ETFs a prudent hedge. A rising dollar and higher real yields will also likely create headwinds for commodities like gold, which often moves inversely to the US currency.
