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What Drives The USD? - Morgan Stanley
We believe the next catalyst for the USD appreciation will be an increase in real yields, which in our view have become the dominant driver of the currency, rather than nominal yields. Evidence that the US output gap is narrowing should prompt higher US real yields and a stronger USD. Given weak growth and low inflation expectations, real yields in Europe and Japan could do with staying low; however, with nominal yields already in negative territory there will in fact be a tendency for real yields to rise in Europe and Japan as inflation expectations fall. This should keep EUR and JPY strong. For many EMs, ... (full story)