Dollar Decline Goes Decadal

Every major currency on the planet rose against the US dollar in July, which is poised to be the worst month for the greenback in a decade.

The dollar decline story would likely get top billing were it not for gold’s epic surge. The two are obviously related, but even as de-dollarization is a theme that generates vociferous debate, it’s just not as sexy as gold at record highs.

Underpinning both the dollar’s stumble and gold’s ascent are plunging real US yields, the perception that the US will trail the world in the recovery trade thanks to an inability to control the virus, and concerns about endemic political dysfunction, exacerbated by an authoritarian turn. The latter worry grabbed the spotlight on Thursday when Donald Trump floated the idea of delaying the US election.

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It’s a perfect storm and it comes as the euro received a material vote of confidence from the market after European leaders established a jointly guaranteed recovery fund, effectively inaugurating fiscal unification.

The greenback’s bleak month feeds into the notion that the glacial pace of de-dollarization may be poised to accelerate, especially as the US becomes more aggressive in weaponizing the currency to punish rivals.

“The FX reserve shares of the euro and China [are] likely to rise versus the US”, BofA’s Michael Hartnett writes, in the latest edition of his weekly “Flow Show” series. He cites the EU’s stride towards a fiscal union and Beijing’s tech war with Washington.

The euro jumped the most since late 2010 this month.

Running back through the numbers, the dollar comprises around two-thirds of global FX reserves, which have risen $10 trillion over the last two decades.

So far in 2020, we’ve seen $20 trillion in stimulus, with $8.5 trillion coming from the monetary side and $11.4 trillion from fiscal packages, BofA’s Hartnett goes on to write, adding that there have been “164 global rate cuts in 147 trading days”.

That type of furious easing is feeding debasement concerns, and thereby the gold rally. $3.9 billion poured into the yellow metal last week, bringing the 2020 inflow to $53 billion, BofA says.

History shows that during the “two great dollar bear markets”, the best performing assets were emerging market stocks, commodities, small-caps, and value, Hartnett went on to write. For a variety of reasons, investors will likely be reluctant to embrace those themes at the current juncture.

“It was, apparently, an attempt to ‘start a debate’ on the topic”, Rabobank’s Michael Every wrote Friday, commenting on Trump’s allusion to delaying the election.

“It also risks starting something a lot worse than a debate”, he added, noting that “a binary ‘Trump or Biden’ on November 3 is perhaps no longer the only outcome — indeed, yields and USD dropped on the Trump tweet for a reason”.



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