The divergence between the U.S. dollar and Treasury yields seen for much of the second quarter is likely to continue, and may be a sign that the greenback's days as the world's safest currency are numbered.
Often, rising U.S. yields are followed by dollar strength because higher rates make the currency more attractive to overseas investors.
But that hasn't been the case since March. In the second quarter, the dollar dropped more than 6 percent against a basket of currencies .DXY, its first quarterly decline since early 2008. Yields on 10-year Treasuries, on the other hand, have risen by more than 0.8 percentage point, the biggest quarterly gain since at least 1998.
The breakdown in the relationship, while in part reflecting an unwinding of safe-haven flows into dollars and Treasuries on recovery hopes, could signal that investors' confidence in dollar assets has waned because of worries about rising deficits and weak economic growth.
"Right now, we think we're in a cycle where the perception of the dollar as a risky currency has gone up," said Steven Englander, head of currency strategy in North America at Barclays Capital in New York.
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