DXY: US Dollar Index edged up on a drop in the EUR despite broad USD weakness

• The US Dollar Index is under pressure on the fall in US bond yields and as inflation concerns ease.
• The DXY is also being helped by a drop in EUR.

The US Dollar Index (DXY) is trading around 89.84 in the New York session, edging up by 0.11% and off the earlier daily high of 90.06 on a slump in EURUSD and despite broad weakness in the US dollar late on Friday.

In the dollar index, EUR carries the largest weight at 57.6%, followed by JPY at 13.6%, GBP by 11.9% and CAD by 9.1%. The remaining 7.8% are covered by the SEK and CHF and it does not reflect the Chinese Yuan or its proxy AUD.

Both the EUR and the USD are under pressure on a slump in their respective bond yields. Also, overall, EU economic data released on Friday came out as expected. This includes the EZ core CPI and German GDP.

The USD came under renewed pressure in late Friday when Fed’s Monetary Policy Report that warned of "rising leverage & elevated valuations" and Dudley, Rosengren said that QE will be back, if necessary. 

The USD is eyeing the renewed US political jitters and fresh charges out of Muller’s marathon investigation regarding alleged Trump and Russian links, fresh US sanctions on the North Korean weapon development program and above a drop in US bond yields on the reduced concern of inflation. The old correlation of US bond yield and USD seems to back again.

On Friday, German as well as US bond yields slumps after some comments by US policymakers’, downplaying the US inflation pressure despite an upbeat wage growth. On Thursday, US Treasury Secretary Mnuchin said Trump administration’s policies will raise US wages without causing broader inflation.

Mnuchin said: “There are a lot of ways to have the economy grow; you can have wage inflation and not necessarily have inflation concerns in general”. A similar view was also echoed by White House economic advisor,  that projected a Goldilocks US economy as it could grow by 3% in 2018 without boosting inflation much.

However, the claim of Mnuchin that there is no link between rising wages and inflation may look bizarre and it may be intended to calm the markets as the US bond yield is set to cross the 3. The yield fell to some extent due to this talk down jawboning effort by Mnuchin.

Meanwhile, GBP is boosted by on hopes of a soft Brexit as UK Prime Minister Theresa May won the backing of her divided Brexit “war cabinet” to ask for an ambitious trade deal with the EU after a marathon eight-hour meeting at her country house, although EU may reject it altogether.

Technically, DXY now has to sustain over 90.65-90.75 zone for a further bounce back, otherwise sustaining below 90.20-90.05, it may fall again.