US dollar topped
Has the US dollar topped? Some would argue that the secular bull market in US dollars, which is soon approaching a decade, has peaked.
October’s approximate 2% depreciation in the US dollar from its giddy six months high in late September has given confidence to those calling a US dollar top.
The US dollar index (DXY), an index (or measure) of the value of the US dollar relative to a basket of foreign currencies, climbed a stairway to an all-time high of 99.38 on September 30. Then in the second week of October, the US dollar Index (DXY) took an elevator down, reaching a low of 97.24 in early November.
The recent sharp down move in US dollar Index (DXY) has many believing that the US dollar has topped
Let’s take a look at whether the US dollar topped view is supported by technical analysis. From the US dollar Index (DXY) technical chart we can see that over a one-year time frame the US dollar fell below its Moving Average Convergence Divergence MACD in mid-October.
Moreover, at the US dollar Index (DXY) low point, the greenback broke below the 100-day simple moving average (DSMA) on October 17 as the market approached the 200 DSMA.
From a technical analysis stance, the US dollar topped view is still be too early to call
Technical analysts remain bullish on the US dollar because the greenback is still trading in a bull trend above the 200-day simple moving average (DSMA).
Let’s mull over some of the fundamental to see whether the US dollar topped view has millage
As I wrote in a recent piece that a Fed’s rate cut trio, made on October 30, was widely anticipated by Fed watchers.
What’s more, the Fed’s decision to align its monetary policy with the other major central banks and transition from monetary tightening to easing is likely to weaken the dollar.
The recent drop in the US dollar, which supports the view that the US dollar topped was event-driven, namely the Fed cutting rates along with the other major central banks
So when the Fed hiked the Fed fund rates and the other central banks did the opposite and lowered to zero and in some cases negative territory that attracted global capital into the US dollar, thereby causing it to appreciate.
The European Central Bank introduced negative rates in June 2014, lowering its deposit rate to -0.1% to stimulate the economy. The Bank of Japan is implementing a negative interest rate policy minus 0.1% as it frets over how it will manage the impact from the US interest rate cut. The Bank of England governor Mark Carney also recently announced that interest rates could be on the cards if global and Brexit headwinds do not ease.
Central bank easing has soared to a decade high with emerging market central banks implementing the most aggressive rate cuts.
Perhaps the US dollar topped when the Fed’s decision to go with the global trend of central banks cutting interest rates
The dollar’s strength was a headwind for the global economy because it makes servicing the interest on dollar-denominated loans more burdensome.
US dollar-denominated loans to non-bank borrowers outside the United States rose to nearly $11.5 trillion at end-June 2018, according to the BIS
Moreover, a large chunk, $3.7 trillion of those dollar-denominated loans were made to non-bank borrowers in emerging market and developing economies (EMDEs). EM dollar-denominated loan is a growing market with annual growth (7%) in 2018.
So a US dollar topped scenario services the very interest of the banking elite, the Fed’s shareholders that could make it happen
A continuing strengthening of the US dollar would create a global Tsunami of dollar debt defaults and that would be of no benefit to the Fed’s shareholders.
Moreover, a strong dollar would not only create a dollar liquidity crisis due to the massive amount of global denominated debts it would also drive up the price of some of the world’s most valuable commodities. Most of the world’s commodities are priced in US dollars and when the dollar appreciates, economies outside the dollar have to pay more for vital commodities in their local currency. So an ultra-strong US dollar could cause a recession in commodity-based economies as other economies cut back on their consumption.
So the US dollar topped view could hold, bearing in mind that the world’s most powerful institution would benefit from weakening the US dollar.
The US domestic economy would also be provided with a tailwind from a weaker US dollar as it would make US exports more competitive in foreign markets.
A US dollar topped is what US President Trump wants too
Trump makes no bones speaking publicly about his discontent with Fed Chair Powell’s tight monetary policy which has strengthened the dollar and stifled US manufacturers.
“Jay Powell and the Federal Reserve have allowed the Dollar to get so strong . . . that our manufacturers are being negatively affected. Fed Rate too high. They are their own worst enemies, they don’t have a clue. Pathetic! Tweet by President Trump, October 1”.
Could a US president intervene to soften the US dollar?
The US Treasury’s Exchange Stabilization Fund has just $23 billion worth of US dollars to sell, plus another $51 billion held in International Monetary Fund reserve assets, according to WSJ. That is a drop in the ocean compared with the $5 trillion foreign-exchange markets, notes WSJ.
But it is the Fed’s motive for a weaker dollar which suggests a US dollar topped last month
A weaker dollar would provide the domestic and global economy with a well-needed tailwind. Along with correcting in the inverted 2s 10s yield curve the Fed’s monetary easing which consists of the rate cuts this year and increasing its balance sheet by 51.1 billion in the last week alone to $4 trillion. So the Fed has made $250 billion of asset purchases over the last seven weeks, which will dilute the dollar. Conversely, any economic turmoil also would increase demand for haven assets, including the dollar.