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King Dollar Surges, but Doubts Over Longevity Linger

The dollar surged Friday, riding on the coattails of the recent surge U.S. Treasury yields amid bets the U.S. will emerge from the crisis stronger than its peers, but the greenback's momentum is unlikely to last, experts warn.

The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, rose 0.87% to 90.91.

Expectations the U.S. economy is likely to emerge from the crisis "better and faster than many other economies" has pushed inflation expectations and the 10-year U.S. Treasury yield sharply higher recently, sparking a move higher in the dollar, Commerzbank (DE:CBKG) said.

Data on Friday, however, showed that fears of runaway inflation could be misplaced as the personal consumption expenditures (PCE) price index, the Federal Reserve preferred measure of inflation, showed price pressures were tepid last month. In the 12 months through January, the PCE price index increased 1.5% from 1.4% in December.

But with another round of fiscal stimulus expected to come, and the Federal Reserve seemingly content to continue its pace of the bond purchases and near-zero interest rates, investors are pricing a further run-up in inflation that could boost prices.

"A round of updates on the US consumer’s financial position offered a glimpse toward what lies ahead in the form of a strong consumer-led rebound driven by massive fiscal stimulus. In the process, evidence of inflationary pressure may well be upon us already," Scotia Economics said.

Others, however, don't expect inflation and the knock-on uptick in the dollar to sustain their run higher.

"For the second half of the year, we expect inflation expectations and bond yields to fall again somewhat. Then the dollar, which is still benefiting from rising US bond yields, should weaken again," Commerzbank added.

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Feb 27, 2020