The dollar slipped against all seven major counterparts on Tuesday as US Treasury yields extended their retreat. The IMF warned that elevated debt and inflation risks could still drive yields higher, and Wednesday's US CPI report is the next test.
The dollar weakened broadly but modestly on Tuesday, slipping against all seven major counterparts as Treasury yields pulled back from last week's highs. The selling lacked conviction, however, and equity markets reacted to a technology selloff in mixed ways.
Treasury yields fall on oil, AI worries and auctions
The US 10-year yield fell below 5.19%, down from last week's 5.365% peak. Softer oil prices helped, as investors weighed the prospect of more Russian diesel supply after a reported US-brokered energy ceasefire between Russia and Ukraine. Implementation of that agreement remains disputed, though.
Renewed concerns over AI investment also fed bond demand. South Korea's KOSPI plunged 5.46% with heavy losses in major chipmakers, and Nasdaq futures weakened. Yet European equities advanced and Dow futures gained, and yields had already started falling after last week's well-received bond auctions.
IMF warns bond-market risks have not gone away
The IMF's latest Global Financial Stability Report warned that elevated government debt, persistent inflation risks and growing borrowing requirements could trigger what the report called a "disorderly" increase in sovereign bond yields. It also flagged leveraged participation in Treasury markets: hedge funds' share of US Treasury holdings rose from approximately 4% in 2022 to 9% in 2025.
ActionForex notes that the warning does not imply an imminent reversal of Tuesday's rally. It does suggest that a retreat in yields should not be mistaken for the disappearance of structural risks.
Euro recovers while the dollar's reaction stays restrained
The euro recovered from last week's pronounced weakness, although that stabilization has not come with a meaningful improvement in French sovereign-risk concerns. Neither the yen nor the Swiss franc drew consistent safe haven demand despite the semiconductor selloff.
Falling yields have not consistently translated into dollar weakness this month, since the greenback kept advancing late last week even as yields retreated. Markets now price a high probability of an October Fed pause.
US CPI is the next test
Wednesday's US CPI release is the immediate test. Headline inflation is expected to rise 0.6% month-on-month, largely on higher energy costs, while core inflation is forecast at 0.2%. A softer underlying reading could reinforce the Treasury recovery, while stronger-than-expected core inflation could revive expectations for further Fed tightening.
Source: ActionForex
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