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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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.
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.
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