From Steve Kamin:
Until the beginning of the second term of President Donald Trump, the sensitivity of the dollar to the difference between the slope of the US yield curve and the foreign yield curve was mainly positive, as expected. The increase in the US 10-year yield relative to abroad increased the dollar.
But immediately after “Liberation Day” in April 2025, when Trump shocked the world with the announcement of “reciprocal” tariffs, the sensitivity turned negative and began to fluctuate around a lower baseline. The change in the sensitivity of the dollar is even more visible when we compare the average value during the period before Liberation Day with that during the period after Liberation Day.
If you think the real interest differential model is the right lens to think about the big driver of the dollar’s movement, then the rise in yield and non-appreciation suggest heightened risk, instead of a higher path for short-horizon interest rates.
Torsten Slok reports that the change in the ten-year yield since the beginning of the year is about a percentage point, which is about half of the higher real short rate, the other half of the real risk premium, inflation expectations and inflation risk…
Source: Torsten Slok.