My understanding is if bond yields increase it creates demand for a currency. But that means bonds are being sold if yields are increasing? So if bonds are being sold and not bought, thus not creating demand for a currency, why do currencies have a positive correlation with bond yields?
Can you see why I’m struggling? Sorry if stupid question.
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Because bond yields go up as bonds are being sold off. Bonds sell off when people, or more importantly, foreign nations, need dollars.
Global trade and the monatary system are transacted in dollars, which means when a foreign country needs to pay its debts or engage in trade, it needs dollars. The way most countries store their dollar reserves, are in the form of US treasuries, and they sell those treasuries to get the dollars they need.
Bond demand goes down, and dollar demand goes up.
Because bond yields go up as bonds are being sold off. Bonds sell off when people, or more importantly, foreign nations, need dollars.
Global trade and the monatary system are transacted in dollars, which means when a foreign country needs to pay its debts or engage in trade, it needs dollars. The way most countries store their dollar reserves, are in the form of US treasuries, and they sell those treasuries to get the dollars they need.
Bond demand goes down, and dollar demand goes up.
currency goes up cause if bonds yields are higher as an investor i have to sell my yen/euro to buy more dollars to buy those better bonds which makes the dollar go higher.
currency goes up cause if bonds yields are higher as an investor i have to sell my yen/euro to buy more dollars to buy those better bonds which makes the dollar go higher.
The easiest way to understand demand for a currency is to think of it as the *demand for involvement in a given economy*. If you want to buy US goods, invest in US companies, or own US bonds, then you need USD.
If USD bond prices decrease, then USD interest rates go up. Higher interest rates are more attractive to investors, which drives demand for USD.
Another key consideration is inflation. As interest rates increase, it gets more expensive to borrow money. This slows down business investment activity and cools the economy overall, which reduces inflation. If price levels in the US are lower than in other countries, US goods become more attractive to import, driving additional demand for USD.
The actual act of selling bonds isn’t a big driver of exchange rates on its own. It’s certainly a piece of the puzzle, but the interest rate impact on exchange rates is much larger in comparison.
The easiest way to understand demand for a currency is to think of it as the *demand for involvement in a given economy*. If you want to buy US goods, invest in US companies, or own US bonds, then you need USD.
If USD bond prices decrease, then USD interest rates go up. Higher interest rates are more attractive to investors, which drives demand for USD.
Another key consideration is inflation. As interest rates increase, it gets more expensive to borrow money. This slows down business investment activity and cools the economy overall, which reduces inflation. If price levels in the US are lower than in other countries, US goods become more attractive to import, driving additional demand for USD.
The actual act of selling bonds isn’t a big driver of exchange rates on its own. It’s certainly a piece of the puzzle, but the interest rate impact on exchange rates is much larger in comparison.
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Think of it this way: If something costs more, people want to buy it less. If bond yields go up, it means borrowing money is more expensive so people don’t want to borrow and borrow more. Instead, they prefer to buy and hold a currency instead, which increases demand for the currency and can cause its value to increase.
Think of it this way: If something costs more, people want to buy it less. If bond yields go up, it means borrowing money is more expensive so people don’t want to borrow and borrow more. Instead, they prefer to buy and hold a currency instead, which increases demand for the currency and can cause its value to increase.
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