{"id":16122,"date":"2018-02-23T05:38:12","date_gmt":"2018-02-23T05:38:12","guid":{"rendered":"http:\/\/thepatientinvestor.com\/?p=16122"},"modified":"2018-02-23T05:38:12","modified_gmt":"2018-02-23T05:38:12","slug":"why-is-the-dollar-falling","status":"publish","type":"post","link":"https:\/\/thepatientinvestor.com\/index.php\/2018\/02\/23\/why-is-the-dollar-falling\/","title":{"rendered":"Why is the Dollar falling?"},"content":{"rendered":"

The broad, trade-weighted US Dollar index has been declining since early 2017.<\/p>\n

\"US<\/p>\n

This is the best explanation I have found for current US Dollar weakness. From Bank of Montreal, BMO Nesbitt Burns:<\/p>\n

The relationship isn\u2019t perfect, but as a general rule of thumb, the USD declines in years when global growth is above potential. In such years, strong global growth causes commodity prices to rise, which lifts commodity currencies. In addition, strong global growth normally triggers a flood of investment out of developed economies and into emerging economies. As emerging central banks intervene to slow the appreciation of their currencies from these two factors, they sell the USD against EUR and other alternative reserve currencies, thereby causing the USD to decline against both developed and emerging currencies. That dynamic helps explains the USD depreciation in 2017 as well as the 2004-2007 period. The 10Y average of the IMF\u2019s World GDP growth rate is 3.4% and we think that is roughly potential growth. The IMF estimates that global growth will come in at about 3.6% for 2017 and accelerate to 3.7% in 2018. <\/p>\n

In addition, the US\u2019s twin deficit fundamental (sum of the current account deficit and fiscal or federal budget deficit as shares of GDP) is another factor that is negative for the USD. Turns in the twin deficit normally precede turns in the USD by 1-2 years and then trends match thereafter. The US\u2019s twin deficit fundamental has been deteriorating for the past two years and is likely to deteriorate further in 2018 and beyond due in part to the tax cuts. When looking at all these factors together with the fact that USD phases tend to last 5-7 years, we feel that we have to forecast a continuation of broad USD weakness\u2014albeit at a slower pace. We project that the broad USD index will fall 1.5% in Q1 and then 1.0% per quarter in each of the remaining three quarters of 2018.<\/p><\/blockquote>\n

Hat tip to David Llewellyn-Smith at Macrobusiness<\/a>.<\/em><\/p>\n

The fall in the Dollar may also be self-reinforcing, as Enda Curran at Bloomberg<\/a> highlights:<\/p>\n

…..On top of the boost already coming from robust global GDP growth, the dollar\u2019s fall over the past year may add over 3 percent to the level of world trade, according to Gabriel Sterne, global head of macro research at Oxford Economics Ltd. Tipping further dollar weakness, the risks are skewed to the upside for Oxford\u2019s baseline forecast for 5 percent growth in world trade in 2018.<\/p>\n

“Falls in the value of the dollar oil the wheels of the global financial system, boosting global liquidity by strengthening balance sheets and alleviating currency mismatches,” Sterne wrote in a note. “One important channel is variation in the differential between the cost of raising dollars onshore and offshore. Dollar weakness reduces the cross-currency basis, increases cross-border lending and boosts bank equities.”<\/p>\n

The biggest winners will likely be emerging economies given the weaker dollar will lower the value of their dollar-denominated debt, taking pressure off their balance sheets and from credit conditions more generally…..<\/p><\/blockquote>\n

Finally, from Deutsche Bank (again hat tip to David):<\/p>\n

How can it be that US yields are rising sharply, yet the dollar is so weak at the same time? The answer is simple: the dollar is not going down despite higher yields but because of them. Higher yields mean lower bond prices and US bonds are lower because investors don\u2019t want to buy them. This is an entirely different regime to previous years.<\/p>\n

Dollar weakness ultimately goes back to two major problems for the greenback this year. First, US asset valuations are extremely stretched. As we argued in our 2018 FX outlook a combined measure of P\/E ratios for equities and term premia for bonds is at its highest levels since the 1960s. Simply put, US bond and equity prices cannot continue going up at the same time. This correlation breakdown is structurally bearish for the dollar because it inhibits sustained inflows into US bond and equity markets.<\/p>\n

The second dollar problem is that irrespective of asset valuations the US twin deficit (the sum of the current account and fiscal balance) is set to deteriorate dramatically in coming years. Not only does the additional fiscal stimulus recently agreed by Congress push the fair value of bonds even lower via higher issuance and inflation risk premia effects, but the current account that also needs to be financed will widen via import multiplier effects. When an economy is stimulated at full employment the only way to absorb domestic demand is higher imports. Under conservative assumptions the US twin deficit is set to deteriorate by well over 3% of GDP over the next two years.<\/p><\/blockquote>\n

\"US<\/p>\n

In summary:<\/p>\n

    \n
  1. Rising global growth boosts commodity prices and emerging markets<\/li>\n
  2. Central banks in emerging markets then sell Dollars to slow appreciation of their local currency<\/li>\n
  3. Fiscal stimulus, such as US tax cuts and infrastructure spending, lifts inflation<\/li>\n
  4. Higher inflation causes a bond bear market<\/li>\n
  5. Fiscal stimulus also widens the current account deficit<\/li>\n
  6. Central bank selling, higher inflation, a bond bear market and wider current account deficits all cause a weaker Dollar<\/li>\n<\/ol>\n","protected":false},"excerpt":{"rendered":"

    The broad, trade-weighted US Dollar index has been declining since early 2017. This is the best explanation I have found for current US Dollar weakness. From Bank of Montreal, BMO Nesbitt Burns: The relationship isn\u2019t perfect, but as a general rule of thumb, the USD declines in years when global growth is above potential. In … <\/p>\n

    Continue reading “Why is the Dollar falling?”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_mo_disable_npp":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[43,46,13,15,34,35],"tags":[3776,927,1220,1406,1828,3775,3556],"class_list":["post-16122","post","type-post","status-publish","format-standard","hentry","category-commodities-gold-commodities","category-deficit-spending-employment","category-inflation-economy","category-investment-infrastructure","category-us-canada-countries-regions","category-us-dollar-index","tag-bond-bear-market","tag-current-account","tag-emerging-markets","tag-fiscal-budget","tag-inflation","tag-twin-deficits","tag-us-dollar"],"yoast_head":"\nWhy is the Dollar falling? - the patient investor<\/title>\n<meta name=\"robots\" content=\"noindex, follow\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Why is the Dollar falling? - the patient investor\" \/>\n<meta property=\"og:description\" content=\"The broad, trade-weighted US Dollar index has been declining since early 2017. 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He founded PVT Capital (AFSL No. 546090) in May 2023, which offers investment strategy and advice to wholesale clients.","sameAs":["https:\/\/facebook.com\/people\/The-Patient-Investor\/61572934660810\/","https:\/\/www.instagram.com\/colin_thepatientinvestor","https:\/\/au.linkedin.com\/in\/colintwiggs"],"url":"https:\/\/thepatientinvestor.com\/index.php\/author\/investor\/"}]}},"jetpack_featured_media_url":"","jetpack_sharing_enabled":true,"jetpack_shortlink":"https:\/\/wp.me\/p9tQ4n-4c2","jetpack_likes_enabled":false,"jetpack-related-posts":[{"id":33902,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/06\/01\/the-dollar-and-commodities-roller-coaster\/","url_meta":{"origin":16122,"position":0},"title":"The Dollar and commodities roller-coaster","author":"Colin Twiggs","date":"June 1, 2022","format":false,"excerpt":"https:\/\/youtu.be\/yB5gW2rulx4 Copper expert Simon Hunt says a temporary truce in Ukraine would not solve long-term tensions between developed economies and the BRICS. Short-term rallies in stocks and commodities during a temporary truce are likely to be followed by a major collapse as conflict and trade tensions re-emerge. Recession will elicit\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"Copper","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-05-30-copper.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-05-30-copper.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-05-30-copper.png?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-05-30-copper.png?resize=700%2C400&ssl=1 2x"},"classes":[]},{"id":26099,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/06\/02\/death-of-the-dollar\/","url_meta":{"origin":16122,"position":1},"title":"Death of the Dollar","author":"Colin Twiggs","date":"June 2, 2021","format":false,"excerpt":"The Dollar, as the global reserve currency, is the single pillar holding up the global economy. It is in turn supported by six stays: interest rates, low inflation, a robust US economy, capital account inflows, a stable political system, and the military. Interest rates and employment Fed monetary policy sets\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":45482,"url":"https:\/\/thepatientinvestor.com\/index.php\/2023\/11\/18\/treasury-yields-and-november-2024-elections\/","url_meta":{"origin":16122,"position":2},"title":"Treasury yields and November 2024 elections","author":"Colin Twiggs","date":"November 18, 2023","format":false,"excerpt":"Ten-year Treasury yields continue to test support at 4.50%. Follow-through below 4.40% would present a target as low as 4.0%. Recovery above 4.50%, however, would warn of another test of 5.0%. The situation is unusually volatile. \u201cWe haven\u2019t seen 15 to 20 basis point moves in the most important market\u2026","rel":"","context":"In "Deficit Spending & Employment"","block_context":{"text":"Deficit Spending & Employment","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/deficit-spending-employment\/"},"img":{"alt_text":"10-Year Treasury Yield","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-11-18-tnx.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-11-18-tnx.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2023\/2023-11-18-tnx.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]},{"id":29533,"url":"https:\/\/thepatientinvestor.com\/index.php\/2021\/12\/02\/the-greenback-the-yuan-and-inflation\/","url_meta":{"origin":16122,"position":3},"title":"The Greenback, the Yuan and inflation","author":"Colin Twiggs","date":"December 2, 2021","format":false,"excerpt":"The Dollar Index has been trending upwards since breaking through resistance at 93.50 in September 2021. The Dollar Index is supposed to reflect the relative trade weight of the Dollar with major trading partners. The four biggest weights are: Euro (EUR) 57.6% Japanese yen (JPY) 13.6% Pound sterling (GBP) 11.9%\u2026","rel":"","context":"In "China & HK"","block_context":{"text":"China & HK","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/countries-regions\/china-hk\/"},"img":{"alt_text":"Dollar Index","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2021\/2021-12-02-dxy.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2021\/2021-12-02-dxy.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2021\/2021-12-02-dxy.png?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2021\/2021-12-02-dxy.png?resize=700%2C400&ssl=1 2x"},"classes":[]},{"id":6595,"url":"https:\/\/thepatientinvestor.com\/index.php\/2013\/01\/28\/is-gold-really-undervalued\/","url_meta":{"origin":16122,"position":4},"title":"Is gold really undervalued?","author":"Colin Twiggs","date":"January 28, 2013","format":false,"excerpt":"I agree with James Turk that gold is a currency. It does not generate income and is simply a store of value. Demand for gold will rise in times of uncertainty and when fiat currencies, against which it is traded, are being debased by central bank balance sheet expansion. Now\u2026","rel":"","context":"In "Gold & Commodities"","block_context":{"text":"Gold & Commodities","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/gold-commodities\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":36387,"url":"https:\/\/thepatientinvestor.com\/index.php\/2022\/08\/13\/gold-rubles-and-the-dollar\/","url_meta":{"origin":16122,"position":5},"title":"Gold, Rubles and the Dollar","author":"Colin Twiggs","date":"August 13, 2022","format":false,"excerpt":"The Dollar Index is testing support at 105 after a strong up-trend. Penetration of the rising trendline signals slowing momentum and increased likelihood of a reversal. Breach of 105 would strengthen the bear signal. Excellent analysis by Elliot Clarke at Westpac warns of a Dollar down-trend: Despite historic strength in\u2026","rel":"","context":"In "Banks & Interest Rates"","block_context":{"text":"Banks & Interest Rates","link":"https:\/\/thepatientinvestor.com\/index.php\/category\/economy\/the-fed-banks-interest-rates\/"},"img":{"alt_text":"Dollar Index","src":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-08-12-dxy.png?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-08-12-dxy.png?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.incrediblecharts.com\/images\/2022\/2022-08-12-dxy.png?resize=525%2C300&ssl=1 1.5x"},"classes":[]}],"_links":{"self":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/16122","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/comments?post=16122"}],"version-history":[{"count":1,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/16122\/revisions"}],"predecessor-version":[{"id":16123,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/posts\/16122\/revisions\/16123"}],"wp:attachment":[{"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/media?parent=16122"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/categories?post=16122"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thepatientinvestor.com\/index.php\/wp-json\/wp\/v2\/tags?post=16122"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}