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Strength in the US Dollar is Easy to Explain

The subject of a strong US dollar came up on Twitter, so let's do a Q&A.
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US Dollar Index courtesy of StockCharts 

US Dollar Index courtesy of StockCharts 

"By far the biggest failure of fintwit community (with the exception of 1 person) has been not being able to explain this and worse, taking a collective bet against the USD in mass. This, to me, is the main story of fintwit..."

Actually, reasons for the strength of the US dollar are pretty obvious, once you know how the index is constructed.

US Dollar Index 

US Dollar Index chart courtesy of ICE Futures. 

US Dollar Index chart courtesy of ICE Futures. 

There used to be five more countries in the index but they were replaced with the Euro. 

The Euro is 57.6% of the index, the Japanese Yen 13.6%, and the British Pound 11.9%.

That pretty much tells you all you need to know. Here are some related details.

  • The ECB and Bank of Japan still have negative interest rates. 
  • The Fed is on a huge rate hike and QT rampage
  • Japan has pledged to defend its 10-year rate to under 0.25 percent. 
  • The ECB will not start QT until some time in the third quarter with no hint of early or later in the quarter.

Japan Industrial Output

Spain Inflation

Germany 

Germany PMI far worse than the US.

What About Gold?

Gold chart courtesy of StockCharts 

Gold chart courtesy of StockCharts 

Many people think the US dollar is holding back the price of gold. But look at the chart.

Gold is over $1800 an ounce. It was $310 or so in 2003 with the US dollar index in the same place.

Moves in the dollar don't really set the price of gold. Rather, gold is a function of faith in central banks.

Gold vs Faith in Central Banks 

Gold vs faith in central banks USE THIS ONE
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People seem convinced that Powell is the second coming of Paul Volcker. Maybe he is for a while, but eventually deficits will come into play. 

Where to for the Dollar?

"DXY is highest since Dec 2002 and it will break through 120 this Fall, I think," says Tamay.

I think not. The 120 level is too far away and there is not enough time. 

If the Fed hints at a pause in the pace of hikes, that will be it for the dollar. At some point the Fed will pause. 

For now, the Fed is on a mission. And as long as it stays on that mission, the dollar is likely to be relatively strong. 

But will that hold long enough for the dollar index to hit 120?

It's possible, but I strongly doubt it. Meanwhile, as long as the dollar fundamentals remain strong, dollar shorts are not the best bet.

Powell: "We understand better how little we understand about inflation”

In case you missed it, please see Powell: "We understand better how little we understand about inflation”

The ECB held a forum on inflation. The Fed, Bank of England, ECB, and the BIS took questions.

Whereas Powell emphatically pledged to tackle inflation, ECB president Christine Lagarde stressed “Moving gradually is certainly appropriate in times of high uncertainty."

See the above link for a pile of interesting quotes.

The US has the strongest economy and is moving the fastest on rate hikes and QT.

There's your strong dollar. One of my readers put it this way "Prettiest gal in the whorehouse."

This post originated at MishTalk.Com.

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