Higher U.S. interest rates recently helped fuel a surprise rally in the dollar

See U.S. Government Bonds Pay More Than Debt From Other Developed Nations: Higher yields reflect investors’ struggle to reconcile expectations for faster U.S. growth with concerns about impact of deficits and inflation by Daniel Kruger of The WSJ.

This is one of the factors that affects the value of the dollar that I talk about when I cover exchange rates. If the interest rate on U.S. government bonds rise relative to those in other countries, the demand for the dollar will increase because investors need dollars to buy more U.S. bonds. So then the value of the dollar also rises. That is, it will take more of other currencies to buy one U.S. dollar.

See Trade Weighted U.S. Dollar Index: Major Currencies (DTWEXM) from the St. Louis Federal Reserve Bank (a timeline chart of this is at the end of the post.

Now an excerpt from The WSJ article:

"U.S. government bonds are paying more than debt from other developed countries for the first time in almost two decades, a new sign of investors’ struggle to reconcile expectations for faster U.S. growth with concerns about the impact of deficits and inflation.

The yield on the benchmark 10-year Treasury note, a key barometer for borrowing costs for consumers and companies, last week topped 3.1%, its highest close in almost seven years. It’s a climb that’s rippling through markets, buffeting stocks and helping fuel a surprise rally in the dollar as higher rates attract yield-seeking investors to the currency.

Analysts said the rise in yields in part reflects optimism about the U.S. economy and expectations for a pickup in inflation, which threatens the value of government bonds by eroding the purchasing power of their fixed payments.  A market-based measure of expectations for annual inflation over the next 10 years, known as the break-even rate, recently reached its highest levels since 2014.

“The U.S. has the highest rates of everyone in the G-10 and it looks like the rate differential will continue to widen,” said Chris Gaffney, president of EverBank World Markets. “The U.S. seems to be going it alone in this rising interest-rate path.”

The 10-year yield’s surge this year has pushed it above yields on bonds from seven major developed countries for the first time since June 2000, according to an analysis by Bianco Research. It recently exceeded the yield on 10-year debt from a record number of countries, according to Deutsche Bank Research, and surpassed the 10-year German bund yield by the most in almost three decades."

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The weakening dollar is having rippling effects around the world.