US yields, a very strong argument in favor of the USD – Commerzbank

EUR/USD has made it back to the 1.09 level. But there is actually a very strong argument in favor of the Dollar at this point: US yields. The measure Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank, prefers to look at here is the real 5Yx5Y Treasury yields.

The USD advantage has increased

What does it mean that the real 5Yx5Y for the Euro area is zero? It means that, from today's perspective, capital cannot be invested profitably in the period from 2028 to 2032. I contrast, even without credit risk, it can be invested in the US with a return of 1.5% per year. That makes the Dollar more attractive than the Euro. Because you need Dollars to make these more attractive investments. 

This discrepancy has existed since 2014 and has long been discounted in EUR/USD exchange rates. But it has widened in recent days. The USD advantage has increased. And that is why EUR/USD is no longer trading above 1.12 but around 1.09.