Yellen's Tax Hike Fuels Further Gains in USD| Influencer‘s Insight •Jasper Lo

The US 10-Year Treasury yield last Thursday (Mar. 18) significantly retreated to 1.6% after reaching a high of 1.75%. Commonly speaking, a shrinking Treasury yield will punish the US dollar, but the fact is the DXY has rebounded from the low of 91.365 to 92.60. Such a rally has a great deal to do with the US Treasury Secretary Yellen. While some analyses indicate the rebound stems from risk aversion as investors turn to the haven-linked dollar and the anti-risk Japanese yen amid geopolitical tensions, I believe the DXY increase is related to Yellen's statement in the congressional hearings

In the face of questions by members in attendance, Yellen said that once the economy was strong again, President Biden was likely to propose that they engaged in long-term plans to address long-standing investment shortfalls in their economy, such as in infrastructure, climate change, etc. One of the proposals to fund the infrastructure program is to increase the corporate income tax rate to 28 percent, which thrusts the financial market into expectations for a tax hike plan. As repeatedly mentioned earlier, the US tax increase could reduce the country's fiscal deficit, boding well for the dollar.

Yellen has been reiterating a bullish economic outlook, forecasting a chance of full employment next year, which refers to an unemployment rate between 4% to5%, compared to the current 6.2%. The financial market is betting that the Fed will position itself to market exit next year. The Fed Chair Powell acknowledged that the country would see inflation rise but the uptick in prices would not be substantial or enduring. He did not signal any intervention in the rising bond yields, nor did he indicate any attempt of Operation Twist, which suggests his acquiescence in the yield boom. With that said, while the 10-Year Treasury yield received some corrections, the DXY, instead of moving at a synchronous pace, embraced a rally.

Along toward the end of Q1, the DXY has gained nearly 3%, while the US 10-Year Treasury yield has surged from 0.9% at the beginning of the year to 1.75%, an increase of 94%. There are streamers asking that at which level will Powell intervene in the swelling bond yields？ My answer is the Fed will launch bailouts only when there occurs a stock market crash, rather than a specific yield level. Considering the flourishing Dow, intervention is the last thing Powell considers. In terms of the DXY performance in Q2, I believe it will be better than that in Q1 and could shot up 4% to 5%.