Dollar Gets More Traction From Rising U.S. Yields

June 01, 2022

U.S. yields continue to recover; May ISM manufacturing PMI will be today’s data highlight; the Fed releases its Beige Book report for the June 14-15 FOMC meeting; President Biden held a rare White House meeting with Fed Chair Powell yesterday; BOC is expected to hike rates 50 bp to 1.50%; Banco de Mexico releases its quarterly inflation report

The public ECB policy debate continues; ECB tightening expectations are rising; final May eurozone manufacturing PMI readings continue the slowing trend; Germany reported weak April retail sales data

BOJ remains ultra-dovish; Australia reported firm Q1 GDP data and final May manufacturing PMI; Caixin reported its May manufacturing PMI; Korea May trade data came in firm; reports suggest OPEC+ is considering exempting Russia from its production agreements

The dollar is getting some more traction as the U.S. yields recover.  DXY is up for the second straight day and trading near 102 after making a new low for this move last week near 101.30.  The euro rally ran out of steam near $1.0785 and it is now trading back near $1.07 despite talk of a 50 bp hike from the ECB (see below).  The weakening trend in the yen has reasserted itself as USD/JPY is up for the third straight day and trading at the highest since May 18 near 129.55.  Clean break above 129.45 sets up a test of the May 9 high near 131.35.  However, we continue to look for our long-standing target of the January 2002 high near 135.15.  Sterling remains heavy below $1.26 after its rally ran out of steam near $1.2665 and we look for continued underperformance ahead.  We still view this recent move lower in the dollar as a correction within the longer-term dollar rally but acknowledge that further gains will be slow until the market pessimism on the U.S. economic outlook improves.  


U.S. yields continue to recover.  The 10-year yield is currently trading near 2.86%, up from last week’s low near 2.70% but still well below the May 9 peak near 3.20%.  Th real 10-year yield has recovered to 0.20% after falling as low as 0.08% last week.  Elsewhere, the 2-year yield is trading near 2.58%, up from last week’s low near 2.44% but still well below the May 4 peak near 2.85%.  The 2-year differentials with Germany, Japan, and the U.K. may have bottomed out but whether the rise in U.S. yields can be sustained will depend in large part how this week’s U.S. data come in.   

May ISM manufacturing PMI will be today’s data highlight.  Headline is expected at 54.5 vs. 55.4 in April.  Keep an eye on the prices paid component, which is expected at 80.5 vs. 84.6 in April.  Chicago PMI came in strong yesterday at 60.3 vs. 55.0 expected and 56.4 in April.  On the other hand, Dallas Fed manufacturing survey came in at -7.3 vs. 1.5 expected and 1.1 in April.  Most of these Fed surveys came in significantly weaker than expected this month, with the exception of Kansas City.  Yet as we’ve point out before, S&P Global manufacturing PMI came in at 57.5 and so the regional Fed manufacturing surveys appear to be overstating weakness.  We’ll know more after today’s ISM reading.  April construction spending (0.5% m/m expected), JOLTS job openings (11.3 mln expected), and May vehicle sales (13.7 mln SAAR expected) will also be reported.   

The Fed releases its Beige Book report for the June 14-15 FOMC meeting.  Since the last meeting May 3-4, many of the manufacturing surveys have weakened.  On the other hand, the labor market remains strong and hiring remains constrained by lack of supply, not demand.  The Fed so far is looking through the Q1 weakness in the economy and we suspect they will maintain this view.  Lastly, most measures of inflation have started to turn lower but remain at elevated levels.  With the Fed signaling that it intends to hike rates 50 bp in both June and July, the Beige Book is likely to accentuate the conditions supporting those moves.  Williams and Bullard speak today.  

President Biden held a rare White House meeting with Fed Chair Powell yesterday.  The meeting was ostensibly to reassure markets of the Fed’s independence as Biden stressed “My plan is to address inflation. That starts with a simple proposition: respect the Fed, respect the Fed’s independence, which I have done and will continue to do.”  Yet was that ever in doubt?  The cynic within suggests that this was an attempt to put more of the blame for higher interest rates on the Fed.  There is plenty of blame to go around.  In hindsight, the last round of fiscal stimulus clearly added to excess demand, while the Fed clearly relied too much on the transitory inflation theme and waited too long to tighten.  

Bank of Canada is expected to hike rates 50 bp to 1.50%.  WIRP suggests nearly 85% odds of a 75 bp move today but we think that is very unlikely.  No analyst polled by Bloomberg sees a 75 bp move.  At the last meeting April 13, the bank picked up the pace of tightening to 50 bp and announced an end to QE that month.  New macro forecasts won’t be released until the next meeting July 13.  WIRP suggests another 50 bp hike in July is fully priced in, followed by about 35% odds for another 50 bp in September.  Looking ahead, the swaps market is pricing in 200 bp of tightening over the next 12 months that would see the policy rate peak near 3.0%.  

Canada Q1 GDP data came in weaker than expected.  Growth was 3.1% SAAR vs. 5.2% expected and a revised 6.6% (was 6.7%) in Q4.  However, the details were more constructive.  Domestic demand accelerated to 4.8% SAAR vs. 3.7% in Q4, but was offset by a -9.4% SAAR drop in exports due to disruptions to oil output.  With oil prices rising again and production back online, exports should rebound in Q2, while the strong labor market should keep consumption going.  In other words, full speed ahead for the BOC.  S&P Global manufacturing PMI will be reported today.  

Banco de Mexico releases its quarterly inflation report. Given recent comments and decisions, we expect the report to tilt hawkish.  At the May meeting, it hiked rates 50 bp to 7.0% by a 4-1 vote, with Deputy Governor Espinosa dissenting in favor of a 75 bp hike.  However, the minutes showed that two more policymakers were open to a larger move.  One of these two is likely Deputy Governor Heath, who recently noted risks of a 75 bp move at the next policy meeting June 23.  It will be a very close call between 50 and 75 bp and will depend on how the data come in.  The swaps market now sees 250 of tightening over the next 12 months that would see the policy rate peak near 9.50%. 


The public ECB policy debate continues.  With May CPI readings coming in hot, the hawks remain vocal on the need to tighten more aggressively.  Today, Holzmann said “A 50 bp rise would send the necessary clear signal that the ECB is serious about fighting inflation.  A clear interest-rate signal would also help to support the euro’s exchange rate. The weak euro is not helpful on the inflation front.”  There will be plenty of ECB speakers today, with Knot, Lagarde, Villeroy, Panetta, and Lane all schedule to speak.  Most are expected to flag July liftoff and a gradual tightening path.  Knot is likely to be the main exception and will most likely echo Holzmann’s call for a larger hike.  

ECB tightening expectations are rising.  No action on rates is expected at the upcoming ECB meeting June 15.  However, the bank is expected to announce an end to APP and help set the stage for liftoff at the July 27 meeting.  We think a 50 bp move remains unlikely then, at least for now.  However, it cannot be totally ruled out and so markets should be prepared for a potential hawkish surprise.  Indeed, the largest German bank now expects a 50 bp move at one of its meetings in Q3.  We will get June CPI readings ahead of the July decision and should help crystallize market expectations.  

Final May eurozone manufacturing PMI readings were reported.  Headline reading was revised up two ticks to 54.6 but has fallen four straight months and continues to general slowing trend seen since the June 2021 peak near 63.4.  Germany and France were both revised up a tick to 54.8 and 54.6, respectively.  Italy and Spain were reported for the first time and came in at 51.9 and 53.8 vs. 54.4 and 53.3 in April, respectively.  Final May eurozone services and composite PMIs will be reported Friday.  Here too, Italy and Spain will be reported for the first time and their composite PMIs are expected at 53.8 and 54.5, respectively.  Both would be down around a full point from April.  While the eurozone economy has been more resilient than we expected, downside risks remain. 

Germany reported weak April retail sales data.  Sales came in at -5.4% m/m vs. -0.5% expected and a revised 0.9% (was -0.1%) in March.  This is the first glimpse at April activity and suggests weakness will continue in Q2.  Recall that German IP fell -3.9% m/m in March, while factory orders plunged -4.7% m/m.  April readings for these two series will be reported next week and markets should be braced for further weakness. 


The Bank of Japan remains ultra-dovish.  Deputy Governor Wakatabe reaffirmed the bank’s dovish bias by stressing that “To address low inflation, it is necessary to persistently continue with monetary easing.  If downside risks to the economy materialize, the bank should not rule out taking the necessary additional easing measures without hesitation.”  We continue to believe Governor Kuroda will maintain current loose policy through the end of his term in spring 2023, leaving it to Prime Minister Kishida to appoint a more hawkish successor to start the tightening cycle.  Elsewhere, Japan final May manufacturing PMI came in at 53.3 vs. 53.2 preliminary but continues the modest declining trend seen since the 55.4 peak in January. So far, Q2 data have been mixed and reflect the uneven nature of the recovery.  Final services and composite PMIs will be reported Friday. 

Australia reported firm Q1 GDP data and final May manufacturing PMI.  Growth came in at 0.8% q/q and 3.3% y/y vs. 0.6% and 2.9%expected, respectively.  Also, Q4 growth was revised to 3.6% q/q and 4.4% y/y vs. 3.4% and 4.2% in Q4, respectively.  Elsewhere, final manufacturing PMI came in at 55.7 vs. 55.3 preliminary but still fell significantly from 58.8 in April.  Final May services and composite PMIs will be reported Friday.  Recent weakness in the PMI readings is likely China-related and bears watching.  For now, the economy remains robust and so the RBA will continue tightening.  WIRP suggests a 25 bp hike June 7 is priced in.  Looking ahead, the swaps market is pricing in over 300 bp of tightening over the next 12 months that would see the policy rate peak near 3.40%. 

Caixin reported its May manufacturing PMI.  It came in at 48.1 vs. 49.0 expected and 46.0 in April.  Contrast this to the official manufacturing PMI, which came in earlier this week at 49.6 vs. 47.4 in April.  Given that lockdowns are just starting to be rolled back, we are a bit surprised that the May PMI readings have recovered so sharply.  Press reports suggest that many shops and businesses remain closed or operating at less than full capacity, while ship and truck traffic remain far below normal levels.  Stay tuned. 

Korea May trade data came in firm.  Exports rose 21.3% y/y vs. 18.4% expected and 12.9% in April, while imports rose 32.0% y/y vs. 31.4% expected and 18.6% in April.  Exports and export orders from regional competitor Taiwan have been coming in weaker and so the strength in Korean exports is surprising.  Taiwan reports its May trade data next Wednesday.   


Reports suggest OPEC+ is considering exempting Russia from its production agreements.  WSJ article said that "some OPEC members are exploring the idea of suspending Russia's participation" and could "pave the way for Saudi, the UAE and other producers in the Organization of the Petroleum Exporting Countries to pump significantly more crude."  Of note, OPEC+ up until now has shown little inclination to make up for reduced Russian output but this most recent move higher in oil prices coupled with rising recession risks may have been the tipping point.  That said, we await official confirmation.  

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