The FX Trader: Long US yields keep the dollar and carry trades alive.

The latest

US CPI fails to knock down long-end yields – or the US dollar. Yesterday’s July US CPI report landed almost precisely on expectations, with headline CPI rising 0.1% month-on-month and core CPI up 0.2%. The kneejerk reaction was straightforward enough: Treasury yields fell across the curve and the US dollar weakened. But the more interesting development came later, as only the front end of the Treasury curve retained much of the move. The result was a bull steepening of the US yield curve, with longer-dated yields giving back much of their initial decline.

That distinction matters for the US dollar. A modest repricing of the next Fed move can pull the two-year yield lower, but the dollar may prove considerably harder to dislodge if the US 10-year and especially the 30-year remain near their cycle highs. The 10-year yield is back near 4.70% this morning. Longer-term US yields are increasingly about more than the precise timing of the next Fed move, with fiscal concerns, inflation risk and the sheer supply of US government debt all part of the equation. For FX traders, the simple point is that a softer Fed path at the front end does not necessarily translate into a softer US dollar if the rest of the curve refuses to rally.

The yen still can't find its feet. USDJPY remains above 159 – likely in part due to still-elevated long US treasury yields. Bloomberg reported overnight, citing unnamed sources, that Prime Minister Takaichi is comfortable with a near-term Bank of Japan rate hike. Short-dated Japanese yields and then yen barely managed to even react to this.

Japanese wholesale inflation this morning could also prompt Bank of Japan to move sooner, as July producer prices rose 7.2% year-on-year. Markets have increasingly brought forward expectations for the next Bank of Japan hike toward September. Still, the JPY reaction has been modest. If intervention, speculation that Takaichi has become more tolerant of a hike and very elevated producer-price inflation are collectively unable to generate a durable JPY rally, the market is telling us how powerful the carry headwind remains while US long-term yields stay this high. But the Ministry of Finance can unleash another round of JPY intervention at any time, possibly if USDJPY nears or exceeds 160.00 again.

A broader carry trade overlay? Yesterday's price action suggested that the story extends beyond JPY. EURCHF pushed to a new 2026 high above 0.9380, continuing the pressure on the zero-yielding Swiss franc. EURSEK meanwhile burst back above 11.00 and traded toward the 11.05 area, while NOKSEK flows may be playing a part in SEK weakness, as that pair pushed back through parity and as high as around 1.0100. That looks at least partly like a carry-trade signal: provided markets remain relatively calm, investors continue to have an incentive to fund in the lowest yielding currencies.

Bottom line(s): If long-dated US yields remain near their cycle highs – or break above them – the dollar may remain firm even if the market continues to trim expectations for Fed tightening at the front end. A 30-year T-bond auction is up later today. Something needs to change in the carry trade and risk sentiment dynamic for JPY to catch a bid (and reverse the other seeming carry-focused action of late in CHF and SEK).

Chart focus: EURSEK

EURSEK is worth putting back on the radar after its sudden push above 11.00 and toward 11.05. Sweden's policy rate remains at just 1.75%, where the Riksbank left it in June while explicitly acknowledging some probability that rates would have to rise later this year.

That makes next week's meeting unusually interesting even if no policy move is expected immediately. The Riksbank makes its decision on Wednesday, August 19 and publishes it on Thursday, August 20. The September decision then comes on September 24 and, unlike next week's meeting, includes a new full Monetary Policy Report and rate path. Market pricing has been assigning something close to even odds to a hike by that September meeting.

The question for EURSEK is whether the Riksbank is prepared to push back against the latest krona weakness. SEK had enjoyed a substantial re-rating earlier in the year, helped by a better European growth narrative and the prospect that the Riksbank's easing cycle was finished. But at 1.75%, Swedish rates offer little carry protection if the market begins to favour funding currencies again.

A sustained EURSEK break higher from here would bring the upper end of the broader 2026 range back into play. Conversely, any hawkish pushback from the Riksbank next week – particularly explicit guidance that the September meeting is live – could quickly make the latest move above 11.00 look like a false break.