The dollar's big retreat against the euro this summer followed the collapse to near zero of the premium on the U.S. Treasury's 10-year real, or inflation-adjusted, bond yields over equivalent euro zone benchmarks. But the buck has bounced sharply as that premium has been rebuilt in recent weeks. Curiously, that hasn't happened by any significant change in nominal yields, but by a relative drop in U.S. inflation assumptions - at least partly on the political failure to renew U.S. fiscal stimulus even as the pandemic continues to spread and despite the Fed's loosening of its long-term inflation goal. Will that endure? Many investors, such as PIMCO, assume fiscal policy will determine inflation outcomes post-pandemic and the chances of fresh government spending persisting beyond the virus (and November's election) is higher in the U.S. than in Europe - notwithstanding the recent delays.
Chart by Ritvik Carvalho and commentary by Mike Dolan.
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