The US Dollar’s (via the DXY Index) strong run continued through the third week of April, adding another +0.62%. The DXY Index has been positive in 12 of the 16 weeks thus far in 2022, good for a +5.69% advance year-to-date. EUR/USD rates, which spent most of the first four days of the week in positive territory, ended up down by -0.11%. GBP/USD rates dropped by -1.71%, their worst weekly performance since June 2021. USD/JPY rates added +1.69%, their seventh consecutive weekly gain.
The narrative behind the US Dollar’s ascent has remained consistent for much of this year: the Federal Reserve is on the verge of a series of significant rate hikes – just look at some of the recent comments by FOMC members – while other major central banks are not. Widening interest rate differentials are propping up the US Dollar, plain and simple.
By comparing Fed rate hike odds with the US Treasury 2s5s10s butterfly, we can gauge whether or not the bond market is acting in a manner consistent with what occurred in 2013/2014 when the Fed signaled its intention to taper its QE program. The 2s5s10s butterfly measures non-parallel shifts in the US yield curve, and if history is accurate, this means that intermediate rates should rise faster than short-end or long-end rates.
After the Fed raises rates by 50-bps in May, there are six 25-bps rate hikes discounted through the end of 2023 thereafter. The 2s5s10s butterfly has traded sideways in recent weeks, suggesting that the market has retained its overall hawkish interpretation of the near-term path of Fed rate hikes. Focus remains more on the Fed and less on Russia’s invasion of Ukraine.
The shape of the US Treasury yield curve coupled with elevated Fed rate hike odds continues to underpin US Dollar strength. The rebound in US real rates (nominal less inflation expectations) further supports what has been a rapid rise by the greenback throughout April. As it stands, it appears that markets are expecting the Fed to raise rates in 50-bps increments in each of the next few meetings, another significant bonafide for the greenback (particularly given the growing chasm between expectations among the Fed, Bank of Japan, and European Central Bank).
Technical Indicators

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