Dollar Firm in Quiet Start to the New Week

January 10, 2022
  • The Fed continues to tilt more hawkish; U.S. rates market continues to adjust to the new Fed messaging; the week starts off quietly ahead of key inflation and retail sales data later this week
  • Brexit tensions are back; calls for U.K. tax relief are growing; Norway CPI data were higher than expected
  • Reports suggest China’s policymakers are encouraging greater consolidation in the property sector

The dollar is trading a bit firmer to start the week. After trading as low as 95.712 Friday, DXY is up modestly today and trading just below 96. The euro remains heavy after being unable to build on Friday’s gain and is trading back near $1.13 again. GBP continues to outperform but is still having trouble breaking above $1.36. Lastly, USD/JPY continues to struggle and is down for the fourth straight day and still recording a series of lower highs. Despite today’s drop back below 116, we continue to target the December 2016 high near 118.65. We expect dollar gains to resume but are certainly disappointed that the more hawkish Fed and higher U.S. yields (see below) have translated yet into larger dollar gains.


The Fed continues to tilt more hawkish. Barkin is the latest, saying that a March hike is “conceivable.” He joins Bullard, who has also said the same thing. Barkin noted that "If you've got an economy that continues the levels of unemployment that we're living through now, which of course is very healthy, with price pressures elevated, I think according to our mandate and framework, we need to move toward normalization." Barkin is not a voter this year but Bullard is. That said, we believe their view is becoming increasingly shared within the wider FOMC. WIRP now suggests nearly 90% odds for March 16 liftoff, and a fourth hike this year is getting priced in more and more. As a corollary of the accelerated timetable, we now believe balance sheet runoff is likely to come towards the beginning of H2 rather than toward s year-end, as previously thought.

The U.S. rates market continues to adjust to the new Fed messaging. The U.S. 2-year yield is trading at a new cycle high near 0.90%, while the U.S. 10-year yield is trading at a new cycle high near 1.81%. With breakeven inflation rates stable, the real 10-year yield continues to climb to -75 bp, the highest since mid-June. All of these moves are likely to continue and should underpin our strong dollar call for 2022. Lastly, the US curve steepening continues in force, with the 3-month to 10-year curve at a new cycle high of 168 bp, just short of the May 2021 high near 169 bp and the March 2021 high near 173 bp. This steepening is welcome and may help allay fears that the Fed tightening cycle will lead to a flat or even inverted yield curve.

The week starts off quietly ahead of key inflation and retail sales data later this week. Today, only November wholesale trade sales and inventories will be reported. There are no Fed speakers.


Brexit tensions are back. Foreign Minister Truss, who recently took over Brexit negotiations from Frost, said she’s prepared to unilaterally override parts of the deal if needed. She said she will put forward some “constructive” proposals this week when meeting her EU counterpart Sefcovic but remains willing to trigger Article 16 as “This safeguard clause was explicitly designed -- and agreed to by all sides -- to ease acute problems because of the sensitivity of the issues at play.” Frost also said he was willing to use Article 16 and so it appears that Truss will maintain the hard party line.

Elsewhere, calls for U.K. tax relief are growing. Cabinet minister Gove joined colleague Rees-Mogg in calling for Prime Minster Johnson to scrap the planned payroll tax hike to help fund that National Health Service. Between this and the expected surge in energy costs this spring, U.K. households face a fiscal cliff that is quite daunting, especially on top of the expected monetary tightening from the Bank of England. While the rate outlook has helped sterling outperform so far in 2022, we believe the fundamental outlook is shaky and will get even shakier as the headwinds mount.

Norway CPI data were higher than expected. Headline inflation came in at 5.3% y/y vs. 5.1% exp3cte and actual in November, while underlying inflation came in at 1.8% y/y vs. 1.4% expected and 1.3% in November. Next Norges Bank meeting is January 20 and rates are likely to remain steady at 0.50% after it hiked rates 25 bp at the last meeting December 16, as expected. Governor Olsen said then that “There is considerable uncertainty about the evolution of the pandemic. But if economic developments evolve broadly in line with the projections, the policy rate will most likely be raised in March.” New macro forecasts and an updated rate path were released last month and will be updated in March. While the growth and inflation forecasts were raised substantially, the expected rate path was surprisingly little changed. Swaps market is pricing in a terminal rate of 1.50% for the policy rate by end-2023, close to the tightening path that the bank has set out in its projections.


Reports suggest China’s policymakers are encouraging greater consolidation in the property sector. State-owned developers are reportedly being urged to take on troubled rivals through M&A activity. Officials in Guangdong province are reportedly facilitating meetings between struggling firms and their state-owned counterparts. While this may alleviate some concerns, it opens up another can of worms as the state basically becomes responsible for any of the contingent liabilities. That said, it is another muddle-through approach that may kick the can down the road again. This is a problem that isn’t going away anytime soon. In related news, shares of troubled developer Shimao jumped on reports that it’s in talks with bigger rivals on asset disposals.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2022. All rights reserved.

As of June 15, 2022 Internet Explorer 11 is not supported by

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see

captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction