US Dollar Rebound Looks Like a Pale Shadow of Its 2022 Surge

(Bloomberg) — The dollar’s recovery from a 10-month low has run into a speed bump, with the rally in the currency trailing behind the sizzling surge in Treasury yields.

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Here are three charts that underscore the potential that the greenback’s gains this year will fail to match its epic 2022 rally, even if the bond market’s expectations for a Federal Reserve interest rate of 5.5% or so come to pass.

Yields, Dollar Part Ways

The 2-year US yield hit its highest in 15 years last week as high labor costs followed on from a stronger-than-expected reading for the Fed’s preferred gauge of PCE inflation to fuel expectations for further Fed hikes. The dollar’s response paled in comparison as it made little headway toward its late September peak.

Europe Looks Hotter

A key reason why Treasury yields may mean less for currency traders is the eurozone’s noticeably scarier inflation outlook has rates traders expecting the European Central Bank to hike by half a point this month while the Fed is seen doing half as much. Thats because core inflation in Europe just popped to a record annual pace of 5.6% in January, while the similar US gauge peaked in September and has slowed for four straight months. Currency traders could pile in to the euro if this divergence continues and spurs yield differentials to move against the dollar.

Taking Money Off the Table

Investors aren’t waiting to be sure the dollar’s run is over — perhaps they reckon the best for the greenback has been and gone. They’ve pulled more than $840 million over the last four months from the world’s largest long dollar ETF, based on cumulative flows, the longest such streak since 2019. Despite the ETF rallying 3.9% from its February lows, the fact that outflows haven’t yet ebbed sends a cautious signal to dollar bulls.