Higher absolute yields in the Eurozone and Japan may drag more capital home, strengthening Euro and Yen and deepening the fall of the Dollar, Kit Juckes, Chief Global FX Strategist at Société Générale, reports.

Will capital repatriation to Europe and Japan extend the Dollar's fall?

“What will drive currency trends in the coming weeks and months? Capital flows may provide some of the answer, and weaken the Dollar further even if rate differentials move less from here on.”

“For European investors, the attraction of higher US yields goes down as Bund yields rise in absolute terms, even if the spread remains wide. And that can keep the Euro (and Yen) climbing even while yield differentials stabilize.”

“In the Eurozone and Japan, central bank buying crowded domestic savers out of domestic bond markets and forced them abroad, weakening EUR and JPY. If the ECB and BoJ can successfully exit from the bond market (and it’s worth noting that in 2018-2018, the ECB tried and failed to do so), maybe their currencies will return to pre-QE ranges eventually, too.”