Economists at Brown Brothers Harriman & Co. (BBH) maintain a bullish outlook for the US dollar amid a prevailing risk environment and last week’s decision by the Federal Open Market Committee (FOMC).
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“Markets were already jittery last week due to aggressive tightening by major central banks, but the massive UK fiscal policy blunder added fuel to the fire. MSCI World tumbled -5% in its worst week since Mid-June and today you are adding those losses. With global growth also slowing significantly, the backdrop for risky assets remains difficult. We expect the dollar to continue to strengthen in this environment, even as expectations of a tightening of the Fed remain elevated.”
“WIRP suggests another 75bp hike is almost fully priced in on Nov 2, as is a further 50bp hike on Dec 14. Elsewhere, the swap market is pricing in a 4.75% terminal rate As a result, US rates continue to rise with the 2-year yield today trading near 4.35%, the highest since 2007, while the 10-year yield trading Friday near 3.82%, the highest since 2010. The 10-year real yield today traded near 1.40%, the highest since 2010. This broad-based rise in US yields is likely to continue and ultimately support the dollar.It is worth noting that the 3-month 10-year curve continues to have a positive slope close to 61 basis points, the steepest since July, so we are not yet ready to talk about an impending recession in the United States.
Source: Fx Street
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