Market Extra: Here’s why the U.S. dollar is nobody’s Valentine

Why couldn’t the U.S. dollar find love on Valentine’s Day?

Despite stronger-than-expected inflation data and rising Treasury yields, the greenback took a nose-dive on Wednesday.

Blamed it on a mixed bag of data. As the January consumer price index rose 0.5%, topping the average forecast for a rise of 0.4%, a separate report showed U.S. retail sales dropped unexpectedly.

See: Don’t be scared by weak retail sales and rising inflation

The latter was taken as a worrisome sign about what to expect from U.S. consumers in 2018, market participants warned, and dampened any bullish ardor stirred by the inflation reading.

The ICE U.S. Dollar Index DXY, -0.83% which had been negative ahead of the data, initially jumped into positive territory and above the 90-mark. Shortly after, however, it erased gains and was last down 0.6% at 89.161, its lowest level in seven days, according to FactSet.

The mixed signals didn’t end there. Treasurys, which the greenback watches for clues because they move in line with interest rate expectations, climbed higher on Wednesday as the buck slipped further and further.

The 10-year Treasury note yield TMUBMUSD10Y, +2.73%  rose more than 8 basis points to trade above 2.91% for the first time since 2014, while the 2-year yield TMUBMUSD02Y, +2.72% which is more influential when it comes to the U.S. currency, rose 6.6 basis points to 2.164%.

Treasury yields rose as expectations for an interest rate hike by the Federal Reserve in March rose to 83.1% on Wednesday, from 76% on Tuesday, according to fed funds futures. That would usually be considered a supportive mix for the currency.

“But it looks like the dollar doesn’t care anymore, as it continues to shrug off better than expected news,” wrote Fawad Razaqzada, market analyst at Forex.com. Indeed, much of the rate rise anticipation was probably already reflected by the dollar’s level, Razaqzada said.

“The market is telling us that the dollar hasn’t bottomed out yet,” Razaqzada said, warning not to ignore the signs. “This could be because of the fact that central banks elsewhere are also turning hawkish. Previously it was a one-horse race, with the Fed being the only hawkish one out there on its own.”

But the Fed’s peers have joined the Fed or appear poised to join it on the long march to monetary policy normalization, including the European Central Bank, Bank of England and cautious Bank of Canada.

Deficit concerns might also be playing a role.

“Currently, I think the near-term dollar outcome is clouded by investor concerns on fiscal expansion and the durability of the economic pickup,” said Steven Englander head of research and strategy at Rafiki Capital Management. “But if activity is sustained and the Fed [tightening is] not so harsh, the current universal dollar negative sentiment may be overturned.”

The Trump administration on Monday laid out a $4.4 trillion budget plan that projects deficits through the next decade, and comes after a two-year budget agreement that would boost federal spending by $300 billion. Analysts worry that a growing deficit will weigh on the dollar.

What makes this fiscal stimulus different is that its the first of its kind to come with the U.S. economy near full employment and not at war, said Bank of America Merrill Lynch analysts Athanasios Vamvakidis and Myria Kyriacou.

Read: Why Trump’s $1.5 trillion infrastructure package could be another weight on the dollar

Also read: Here’s where the money goes in Trump’s infrastructure plan

”We expect the substantial deterioration of the U.S. fiscal balances following the tax cuts and the substantial increase in spending to be positive for the dollar in the short term and negative in the long term,” wrote Vamvakidis and Kyriacou. “In the long term, high inflation, worse debt dynamics and a higher current account deficit are consistent with a weaker equilibrium exchange rate.”

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