The dollar remains firm as the new week begins – BBH

Economists at Brown Brothers Harriman & Co. (BBH) maintain a bullish outlook for the US dollar amid the prevalent risk-off environment and last week's hawkish FOMC decision.

Key Quotes:

“Markets were already nervous last week as major central banks tightened aggressively but the huge fiscal policy mistake from the U.K. added further fuel to the fire.  MSCI World tumbled -5% in its worst week since mid-June and is adding to those losses today.  With global growth also slowing significantly, the backdrop for risk assets remains challenging.  We expect the dollar to continue strengthening in this environment even as Fed tightening expectations remain elevated.”

“WIRP suggests another 75 bp hike is almost fully priced in for November 2, as is a follow-up 50 bp hike December 14.  Elsewhere, the swaps market is pricing in a terminal rate of 4.75%.  As a result, U.S. rates continue to rise.  The 2-year yield traded near 4.35% today, the highest since 2007, while the 10-year yield traded near 3.82% Friday, the highest since 2010.  The real 10-year yield traded near 1.40% today, the highest since 2010.  This generalized increase in U.S. yields is likely to continue and will ultimately support the dollar.  Of note, the 3-month to 10-year curve remains positively sloped near 61 bp, the steepest since July, and so we are not yet ready to call for an imminent recession in the U.S.”