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Strengthening US Dollar and High Bond Yields: Implications for Global Markets

INVESTINGStrengthening US Dollar and High Bond Yields: Implications for Global Markets

The recent strengthening of the US dollar continues to exert pressure on emerging markets and their currencies. Simultaneously, bonds—both in the US and elsewhere—are offering highly attractive yields, drawing investors seeking to minimize risk.


Outlook for US Interest Rates

Hopes for US interest rate cuts in 2025 have all but vanished. This shift is largely attributed to surprisingly strong economic data, including the latest Non-Farm Payrolls (NFP) report and rising service sector prices in the ISM report. Yields on 10-year US Treasury bonds are hovering around 4.6–4.8%, reflecting market sentiment.

Investors fear that persistently strong US economic data, particularly from the labor market, coupled with former President Donald Trump’s protectionist rhetoric and potential high tariffs, may drive inflation higher or prevent it from dropping below the Federal Reserve’s target. This leaves the Fed in a difficult position, potentially unable to pursue the pre-election rate cuts anticipated earlier.

In an extreme scenario, while the likelihood of a rate hike remains low, it is no longer entirely off the table—a stark contrast to market expectations just months ago.


Flight to US Treasuries

With economic challenges in Europe and China and relatively low yields in these regions, US Treasury bonds, offering nearly 5% returns, remain an attractive option for global capital. In October, markets priced in expectations for up to six Fed rate cuts in 2025. Now, only one cut is expected, reinforcing the appeal of US Treasuries.

According to Maksymilian Kuch, equity market analyst at XTB:

“US bonds are very popular among investors, but dividend-paying stocks also present a tempting alternative due to rising yields. The question remains: when will this trend stabilize?”


Impact of Trump’s Policies

Investors are adjusting to a potential new reality under Trump’s leadership, which may include aggressive trade policies. If these policies are implemented, US Treasury yields are likely to remain elevated—at least until US consumer demand shows clear signs of weakening.

Kuch adds:

“Trump’s promises suggest a loose fiscal policy and high government borrowing needs, despite record US debt levels.”

For the US dollar to lose strength, inflation data (CPI) would need to meet or fall below forecasts, coupled with weaker retail sales figures.


A similar situation is unfolding in other countries. In the UK, uncertainty surrounds fiscal policy and the government’s ability to sustain high borrowing levels. Rising bond yields have already increased public debt servicing costs, potentially necessitating fiscal tightening.

Polish bonds are also offering attractive yields, with investors closely monitoring when Poland’s Monetary Policy Council (RPP) might decide to cut interest rates. Recent comments from the President of the National Bank of Poland (NBP) have added uncertainty, as he suggested there may be no rate cuts in 2025.

Kuch advises:

“Investors should wait until the RPP’s March meeting, when the NBP will present updated inflation projections. By then, the direction of US policies under Trump’s leadership should also become clearer.”


The Choice Between Bonds and Dividend Stocks

While US bonds remain a favorite among risk-averse investors, dividend-paying stocks are emerging as a compelling alternative due to their rising yields. However, the decision between the two will depend on market developments, particularly in the US labor market and inflation trends.

Source: CEO.com.pl

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