Dollar hits lowest since June while the 10-year yield climbs to 4.73%, as the two diverge

The US dollar index stood at 99.40 on Tuesday (August 18), its weakest level since June and a third consecutive session of declines. Over the same period, the yield on the 10-year US Treasury note was at 4.73%, edging higher from the previous session.

These two numbers do not usually move in opposite directions. In most periods, rising Treasury yields mean a higher return on dollar assets, drawing cross-border flows and lifting the dollar; conversely, falling yields typically accompany a weaker dollar. Tuesday's combination broke with that convention.

One common way to explain it is to decompose the nominal yield. A nominal rate is broadly the sum of a real rate and inflation expectations. If the part that is rising comes mainly from inflation expectations rather than real return, then the actual purchasing power of holding dollar assets has not improved, and the dollar gets no support. Firmer oil prices this week, disrupted transit through the Strait of Hormuz, and the International Energy Agency's warning of the widest supply deficit in five years in 2026 are all feeding that inflation-expectations side. Confirming this reading requires watching the corresponding move in Treasury breakeven inflation rates; the nominal yield alone is not enough to draw a conclusion.

Another angle concerns the shape of the rate path rather than its level. July CPI rose 3.4% year over year while PPI was flat month over month with the annual rate easing to 4.7% — both below expectations. Markets have largely ruled out a Fed hike at the September meeting and price a December hike at roughly 63%. Expected tightening has been pushed back rather than cancelled, so front-end pricing has softened while the long end holds firm on inflation and supply factors, steepening the yield curve. In that configuration the dollar gets no support from front-end rate differentials, and the rise in long-end yields does not transmit to the exchange rate.

For precious metals, this divergence explains an apparent contradiction: gold normally moves inversely to nominal rates, yet on Tuesday spot gold was quoted at US$4,429.49, up 0.30%, rising alongside yields. What gold is actually anchored to is the real rate, not the nominal one. When the increase in nominal yields is contributed by inflation expectations, the real rate has not risen — gold is not suppressed but instead benefits from hedging demand. A simultaneously weaker dollar further lowers the cost of dollar-denominated gold for non-US buyers.

The FOMC minutes due Wednesday (August 19) at 21:00 GMT+3 will be the first test of this pricing. The July 28-29 meeting held rates at 3.50%-3.75%, with three officials dissenting. If the minutes show the committee is less tolerant of inflation than markets currently assume, front-end pricing could be pulled back and the dollar-yield divergence would narrow with it. If not, the divergence has room to persist.

Disclaimer

This content represents market information and opinion sharing only and does not constitute investment advice, an offer, or a solicitation. Financial markets carry risk, and leveraged products may result in the total or partial loss of capital. Investors should form their own judgement based on their financial situation, investment objectives and risk tolerance, and bear the corresponding risks themselves.