The US dollar continues to push higher, helped along by the lack of growth in Europe, with the ECB making noises towards a further easing. Also, the political infighting within the EU is just starting as the remaining nations have to face up to a big £60bln fiscal shortfall caused by the UK’s departure, with the northern nations wanting spending cuts and the poorer southern and eastern countries wanting higher budget contributions. At the same time, Japan’s continued poor outlook also helps the US unit; the Japanese PMI series for manufacturing this morning is the lowest reading in seven years and the continued concerns for Chinese growth with the spread of the virus is weighing on the region as a whole. So it should not come as a surprise that the dollar is up again, indeed 2.38% (at the time of writing) this month when measured by the DXY index which averages the US dollar exchange rate against major world currencies. Furthermore, with US interest rates high on a relative basis against most of the majors, it appears the greenback is only headed in one direction for the moment!
The aforementioned DXY index has not traded over 100, currently 99.83 at the time of writing, since December 2016 and then it held there for just a couple of months. The time before that was back in 1999 to 2003, seventeen years ago. This is because a strong dollar, being the major reserve currency, has wide ranging consequences for the global outlook. Trump’s trade wars will certainly not be helped as US exports become more expensive while all other exporters become cheaper. Also, the Fed has constantly missed its dual mandate of employment and inflation by their inflation target of 2%. A strong dollar compounds the negative pricing in commodities markets, adding to the inflation headwind for the Fed.
So what is the outlook should the dollar stay strong? Donald Trump will be more critical than ever before, especially ahead of the election; the Fed will see inflation dropping, which is good for bonds, and should this all be going on when we get a dip in US economic performance then the Fed will be pushed into easing, certainly in the first half of the year, offering opportunities for non-dollar currency exposure and lower US bond yields.