As investors peer into the coming year, one thing is eminently clear: Namely, what is top of the mind for them is whether the Federal Reserve is finished raising interest rates and will lower rates next year. While interest rate expectations always matter, the gyrations of financial markets – stocks, bonds, and the dollar — the past two years have been dominated by expectations about what the Federal Reserve will do.
The first chart shows there has been a close correlation between 10-year Treasury yields and the trade-weighted dollar index over this period. Bonds have sold off (yields have increased) and the dollar has rallied when investors believed the Fed would raise rates. Conversely, yields have fallen and the dollar has weakened when investors anticipated an end to Fed tightening.
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