Is ‘King Dollar’ Finally Rolling Over?

It’s been a long time coming, but it looks like “king dollar” might finally be on the verge of rolling over in earnest.

Bloomberg’s gauge is down some 1.5% on the month and if things keep going like they’re going, that will mean BBDXY closes lower for the year.

Persistent dollar strength has been an Achilles heel of sorts for Donald Trump in the trade war. Suffice to say the greenback did not respond to the precipitous decline in the short rate as the Fed pivoted.

Of course, the irony is that Trump’s own policies (both domestic and foreign) were in part responsible for the greenback’s stubborn character in 2018 and during the first three quarters of this year.

Trump encouraged US economic outperformance in two ways. His decision to pile fiscal stimulus atop a late-cycle dynamic delivered a sugar high to the domestic economy last year, while the uncertainty fostered by the trade war served as a drag on economic activity abroad.

The Fed, concerned that the stimulus measures might overheat the economy, was forced to lean more hawkish than they otherwise might in 2018, widening the monetary policy divergence with the rest of the world.

All of that together created the conditions for a resilient greenback. “Cleanest dirty shirt” flows into USD assets added an extra bit of oomph.

In addition to handicapping Trump in his quixotic, multi-sided trade war, the resilient dollar raised the specter of imported disinflation. If you assume that economic growth in the rest of the world will continue to trail that in the US, you’re left to ponder a truly tragicomedic outcome that finds better growth outcomes stateside driving inflation lower, instead of higher.

“The fundamental risk for the Fed’s inflation narrative is that the flat Phillips curve suggests that even above trend growth might not generate enough domestic inflation to offset dis-inflation imported by dollar strength that is driven by that same above trend growth”, Deutsche Bank’s Stuart Sparks wrote in his year-ahead outlook earlier this month. “In these circumstances, ironically, the net result could, perversely, be that above trend growth lowers inflation!”, he went on to exclaim.

In that respect – and also just in terms of the extent to which dollar weakness is conducive to easier financial conditions and looser liquidity, not to mention being a boon to the reflation narrative – December’s dollar weakness is welcome news.

Coming as it does on the heels of October’s swoon in the greenback, the Q4 slide sums to nearly 2.5%. That would make this the worst quarter for the greenback since Q1 2018.

Not surprisingly, this has been the best week for gold since August.