Dollar: Policy-Driven Yield Pullback — UBS

UBS Chief Economist Paul Donovan noted that the U.S. Treasury's plan to at least double its purchases of long-dated U.S. Treasuries has triggered a bond market rebound, pushing the 10-year yield back to levels seen a week ago. The dollar index is currently trading near 98.61.

**Policy Intent: Hedging Against Unexpected Shocks**

Donovan believes higher yields would exacerbate the U.S. affordability crisis and debt servicing costs. The new policy aims to offset the unexpected impact of the Gulf War and tariffs on the bond market, rather than simply suppressing interest rates. This assessment aligns with UBS's prior structural view on fiscal concerns—fiscal headwinds and investors' elevated dollar asset allocations continue to weigh on the greenback.

**Dollar Trajectory: Short-Term Rebound Alongside Medium-Term Softening**

UBS continues to expect that, with U.S. inflation likely to moderate further in the coming months and the Fed potentially remaining in a wait-and-see mode, coupled with lingering fiscal concerns, the dollar is poised to soften over time. Data shows that the 30-year Treasury yield auctioned by the U.S. Treasury last week reached 5.216%, the highest level since 2001, reflecting investors demanding greater compensation amid widening deficits. The current policy of doubling long-dated Treasury purchases is a direct response to this pressure.

**Allocation Implications: High-Yield Currencies and the Yuan**

In a range-bound FX environment, UBS believes high-yield currencies can offer potential carry returns and are the preferred assets in the current landscape. In Europe, it favors the British pound and the Norwegian krone, while in the Asia-Pacific region it prefers the Australian and New Zealand dollars. UBS also sees the yuan potentially continuing to appreciate, given China's annual trade surplus of roughly $1.2 trillion, leaving room for conversion demand to drive the yuan stronger, and projects USD/CNY to move toward 6.50 by June 2027.