Weaker Dollar Outlook

Recovery of the Dollar has been overrated. With restrictions on fiscal deficits, it will be difficult to contain deflationary pressures from the Great Credit Contraction which is likely to endure for at least a decade — following the Great Credit Bubble over the last 40 years. Fed quantitative easing is likely to endure for longer than many observers, myself included, initially expected. And inflation will remain low despite QE, which is offset by deflationary pressures from the Great Credit Contraction.

The lower inflation outlook is reflected by falling gold and rising bond prices.

The Great Credit Bubble

There were two distinct credit bubbles in the last 50 years: the first in the 1980s, the second in the early 2000s. The chart comparing growth in Domestic Nonfinancial Credit (both Private and Government) to nominal GDP shows two clear episodes where credit growth outstripped GDP. Both resulted in significant falls in GDP from which the economy struggled to recover. The latter episode fed into the housing market, leading to the global financial crisis.

Dollar Index

The Great Credit Contraction

If we look at total Domestic Nonfinancial Credit, the rate of growth remained positive. So why call this a contraction? But the aggregate conceals a hidden danger: private household credit contracted, threatening a deflationary spiral similar to the 1930s — when GDP fell almost 50 percent.
Domestic Nonfinancial Credit - Households
Which is why the Federal Government frantically borrowed money for stimulus spending — to offset the effect of private credit contraction.
Domestic Nonfinancial Credit - Federal Govt
Government deficits have not solved the problem — they are merely kicking the can down the road. Household credit growth continues to lag GDP.
Dollar Index

Outlook for the Dollar

The Dollar has not benefited from the lower inflation outlook as interest rates are also likely to remain low. Primary advance of the Dollar Index ($DXY) seems to be losing steam, with a lower peak than mid-2012. Expect a test of primary support at 79. Penetration of the rising trendline would indicate trend weakness, while failure of support at 79 would signal a reversal. Twiggs Momentum is approaching the apex of a long-term triangle; reversal below zero and the rising trendline would also warn of a reversal.

Dollar Index

5 Replies to “Weaker Dollar Outlook”

  1. What is your thoughts re; the US retail sector is deleveraging at a much faster pace than the fed can print money,hence less dollors in circulation,hence the dollar strengthens in a deflationary environment,not weakons. Jay.

    1. Look at the big picture: is the retail sector deleveraging faster than the Federal government is borrowing? Total domestic nonfinancial credit growth (including Federal govt.) is growing in line with GDP. So no deflationary pressure unless government reduces its budget deficit.

      P.S. Corporate sector credit growth has returned to trend, matching GDP growth. The problem is household credit.

  2. Twiggs, given your dismal US $ outlook – fundamental & technical (which I find plausible) – the exagerrated pummeling of gold recently and the resultant supply constraints , the technical charting picture appears highly supportive of a new bull market bottom formation. Some more technicals on gold from yourgoodself may highlight the latter. Thanks

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