Dollar Firm as Eventful Week Begins

September 19, 2022
  • This is a huge week for central banks; U.S. yields continue to rise; Fed tightening expectations remain elevated
  • ECB officials remain hawkish; Bundesbank noted growing risks of recession in Germany
  • RBA acknowledged the negative impact of its rate hikes on the housing market; China officials continue to lean against yuan weakness

The dollar remains firm as a very eventual week begins. DXY is up for the third straight day and trading back above 110. With the Fed expected to remain hawkish (see below), we look for a test of last week’s cycle high near 110.786. The euro remains heavy and is trading just below parity. With the fundamentals deteriorating, we still look for a test of this month’s cycle low near $0.9865. U.K. markets are closed for the Queen’s funeral. Sterling also remains heavy and traded today near last week’s cycle low of $1.1350, the lowest since 1985. Charts point to a test of the February 1985 all-time low near $1.0520. Lastly, USD/JPY continues to trade sideways near 143.50 as last week’s BOJ rate check continues to dampen the upward trajectory of this pair. If the BOJ meeting ends with a dovish hold Thursday as we expect, yen weakness should resume. The repricing of Fed tightening risks is likely to keep the dollar bid across the board near-term. As we said during this most recent dollar correction lower, nothing has really changed fundamentally and the global backdrop continues to favor the dollar and U.S. assets in general.


This is a huge week for central banks. Not only is the Fed expected to hike rates 75 bp Wednesday, but several other major central banks are also delivering higher rates. The Riksbank is expected to hike rates 75 bp Tuesday, while the SNB is expected to hike 75 bp and the BOE and Norges Bank both by 50 bp Thursday. In EM, South Africa, Taiwan, the Philippines, and Indonesia are all expected to hike rate this week. Tighter global liquidity will lead to slower global growth and so the backdrop remains very negative for risk assets, especially EM. Even though other central banks are hiking, the Fed remains the leader and so the dollar should continue to gain.

U.S. yields continue to rise. The 2-year yield is trading at a new cycle high near 3.92%, while the 10-year yield is trading near the June 14 high near 3.50%. The real 10-year yield is trading near 1.11% and is on track to test the November 2018 cycle high near 1.15%. This generalized increase in U.S. yields should continue to support the dollar. Of note, the 3-month to 10-year curve remains positively sloped near 38 bp and so we are not yet ready to call for a recession in the U.S.

Fed tightening expectations remain elevated. WIRP suggests nearly 25% odds of a 100 bp hike Wednesday. While we favor 75 bp, we acknowledge risks of a hawkish surprise. With a 100 bp move, the Fed could send a very strong message to the markets that it is very serious about getting inflation back to target. Looking ahead, the swaps market is starting to price in a terminal rate of 4.75% over the next 12 months, up sharply in recent days and making new highs for this cycle. Indeed, we expect a hawkish shift in the Dot Plots, with the expected policy rate moving up to 4.0% in 2022 and up to 4.25-4.5% in 2023. For 2024, the expected rate is likely to remain steady in order to underscore that any sort of pivot is not foreseen, at least for now. Powell’s press conference will be key but we expect no deviation from the hawkish tone he delivered at Jackson Hole August 26 and reinforced at his only follow-up speech September 8. There should be a singular focus on taming inflation and no hints of a pivot.


ECB officials remain hawkish. Over the weekend, Nagel stressed that “If the data trend continues, more interest-rate increases have to follow -- that’s already agreed in the Governing Council. We have to be determined, in October and beyond.” He also said that “We’re still very far away from interest rates that are at a level that is appropriate given the current state of inflation. More needs to happen, rates have to go up -- by how much is still to be determined,” Elsewhere, Guindos said “We must reinforce all the elements that support the credibility of the central bank, avoiding second-round effects. The slowdown will not reduce inflation by itself. Monetary policy needs to contribute to ease inflation.” WIRP suggests 85% odds of another 75 bp at the next meeting October 27, while the swaps market is pricing in 200 bp of tightening over the next 12 months that would see the deposit rate peak near 2.75%.

The Bundesbank noted growing risks of recession in Germany. In its monthly report, the bank noted “There are increasing signs of a recession of the German economy in the sense of a clear, broad-based and longer-lasting decline in economic output.” It noted that limited energy shipments in particular are leading to rising inflation and increased uncertainty that is affecting both German companies and households. The bank added that stockpiled natural gas supplies will probably help to avoid formal energy rationing this winter, economic output is likely to decline “somewhat” in Q3 before a “noticeable” contraction in Q4 and Q1. Lastly, the Bundesbank believes the economy will probably be able to avoid the adverse scenario set forth in its June projections, which forecast an overall GGDP contraction of -3.2% next year but warned that the outlook is still “extremely uncertain.” September PMI readings out this Friday should confirm what markets already know, and that is Germany is already in recession.


The RBA acknowledged the negative impact of its rate hikes on the housing market. Head of domestic markets Jonathan Kearns noted that “Because higher interest rates reduce borrowing capacity and increase loan repayments, they typically result in a decline in new housing borrowing. The timing and strength of the relationship between interest rates and housing borrowing can vary, not least because the factors driving interest rates, such as income growth, can also directly affect housing demand, but there is no doubt that interest rates are an important determinant of housing finance.” The RBA has hiked rates a total of 225 bp so far and Kearns estimated that this would cut maximum loan sizes by about 20%. We note that the swaps market is pricing in another 165 bp of tightening over the next 12 months that would see the policy rate peak near 4.0%, which means even greater pain ahead for the Australian housing sector. Yet like what we are seeing here in the U.S., this is exactly what the RBA wants to see. WIRP suggests nearly 60% odds of a 50 bp move at the next meeting October 4

China officials continue to lean against yuan weakness. The bank set today’s fix at the strong side of market expectations by 647 pips, the most ever. The fix of 6.9396 came despite both CNY and CNH trading well above the 7 level. This comes just days after a senior SAFE official Wang warned that companies should refrain from speculative trading and adhere to a “risk neutral” stance in managing FX risks to cope with external shocks. Yet with monetary policy divergences growing, the yuan is only going to get weaker and so policymakers can only hope to slow the move, not reverse it. USD/CNY and USD/CNH are on track to test the 7.1775 and 7.1965 highs from May 2020, respectively.

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