Dollar Doldrums To Continue As "Fantasy World Of Rate Normalization" Unwinds
By Tyler Durden
Despite today's jump in the USD index, the sharp dollar selloff trend remains even as U.S. rates have climbed and the commodity rally pauses. It’s logical to query if there is an end in sight for the rout. The short answer, according to Bloomberg's Mark Cudmore, is no. The dollar may be due a bounce, but that would likely mark a consolidation phase rather than a trend reversal.
Today was the Bloomberg Dollar Index's best day since Nov 2015…
The Bloomberg Dollar Index is down about 8% since the end of January and trading at its lowest level in a year. Those looking for support from a pickup in Treasury yields would do well to bear in mind that the correlation recently switched to negative. These days, a rise in Treasury yields is more likely to be accompanied by a weaker dollar.
It is also worth remembering that 10-year yields are 75 basis points lower than two years ago while the dollar is nearly 15% stronger. The currency was pricing in what now looks like a fantasy world of the U.S. entering a proper rate-hiking cycle in isolation. That needs to be unwound…
The theory of the U.S. decoupling from the global economy was painfully debunked in 2008 on the way down; it has now been debunked in potential recovery as well.
The greenback has fallen after the start of the last three U.S. hiking cycles partly for that reason. Basically, if the U.S. is raising interest rates it generally means the global economy is in an OK place. In such a situation, investors tend to re-leverage and sell the dollar.
The dollar collapse is starting to look stretched short-term and a technical bounce lasting a few weeks could occur, for example from risk-aversion and a flow into Treasuries, but that isn’t a recipe for long-term strength.
Source: Dollar Doldrums To Continue As "Fantasy World Of Rate Normalization" Unwinds
