Why Is the US Dollar Rising?
So where will mobile capital flow in an environment of rising socio-political risk, a multi-year USD uptrend and a dearth of safe, liquid markets?
On October 3rd I asked Is the U.S. Dollar Set to Soar? It seems the answer was yes. Here’s the weekly chart of the USD I posted on October 3rd:
And here’s the current weekly chart of the USD:
Note the apparent breakout above 100 and the constructive similarities to the 2014 breakout that was followed by a 20% increase in the purchasing power of the USD relative to other currencies.
This begs the question: could the US dollar be starting another extended leg higher that would eventually take it to 120, a 20% gain from its current level?
This raises a further question–why shouldn’t the USD rise another 20%?Longtime readers are all too familiar with my many essays on the US dollar over the past four years, and so they shouldn’t be surprised that the USD is moving higher.
While I have great respect for the analytic skills of the many dollar bears who have expected the USD to decline or collapse, we all have to respect the market’s movement. In the case of currencies (which trade in the trillions of dollars daily), it’s difficult to make a persuasive case that currency trends are driven by central bank interventions.
Policies such as interest rates and bond-buying, yes–intervention, not likely. The currency markets trade the entire Federal Reserve balance sheet–roughly $4 trillion–every two days.
So we have to look beyond manipulation for explanations of the USD’s uptrend. The conventional view–which I have shared–is that the trend toward higher yields in the U.S. acts as a magnet for capital in a zero or negative-yield global economy.
The other dynamic that have been widely covered is the demand for USD to pay loans denominated in dollars.