How strong is the dollar and what will America’s new commander in chief tolerate in terms of USD strength? Those are two questions worth pondering.
Indeed Deutsche Bank is especially curious as I outlined earlier today.
Of course the exercise of speculating where we’re headed must necessarily be preceded by outlining where we’ve been and where we are currently. To that end, here’s Deutsche Bank with a look at the trade weighted dollar relative to historical precedent (emphasis mine)…
It is possible that a strong USD will be worn by the coming administration as a badge of honor – a signal of global confidence in “Trumpism”. Much more likely, because it is more consistent with trade and manufacturing objectives, policymakers will wish to keep USD strength in check. This is unlikely to translate into an overt attempt to drive the USD weaker. In a world where the US is thinking about pump-priming its full employment economy, the strong USD would need to play a vital role in offsetting inflationary pressures, or the US bond market could go into a tailspin.
Against this backdrop we believe there is likely to be some scope for USD appreciation of at least 5% on a broad TWI. Historically, clear USD overshoot terrain entails the real broad USD TWI tracking around 20% above long-term moving averages, or ~10% above current levels. These levels likely demarcate the line where an activist Administration might intervene aggressively to weaken the currency. In the interim, the logical course is to make it clear that while a strong USD is in the US interest, an overly strong USD is not.