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Return Of The King
The dollar is back. Or at least it was for a week.
A steadily declining greenback was a fixture of the post-March surge in risk assets. Tales of king dollar's demise pervaded the thick, virus-laden summer air.
As US real yields plunged deeper into negative territory, sentiment around the world's reserve currency deteriorated steadily. America's ballooning deficit and bungled COVID containment effort just added to the malaise. By mid-August, hedge funds were net bearish for the first time in mo
The real yields against gold chart is a good one. Everyone should ask themselves if they believe the FED will allow yields to rise in any sustained way after they have essentially telegraphed that inflating away the debt bubble is the preferred path of “default”. I don’t see real yields rising, unless it is via deflation that they cannot control with monetary policy and they refuse to go into NIRP.
I agree. I don’t see real yields rising either, unless deflation picks up as they refuse NIRP as you say. YCC. They’ll buy up whatever assets are necessary at the durations they target to keep yields at their target or below. They have trillions to work their magic with.
Rising real yields and watch out! After a deflationary death spiral, the last thing the Fed and other central banks want is rising real yields.
To avoid a personal bias I have about the dollar, a bias that says it’s got nowhere to go but down, I remind myself of the Eurodollar market and just how large it is. Sure, there are events that chisel away, like bi-lateral trading of oil in non-USD currency. But, the size of this Eurodollar market is approaching $14T. It’s gotten bigger over time. This market is used for cross-country settlement of transactions. It’s not going to go away anything but slow and over time. And there are all the foreign borrowers, corporate and sovereign, who have taken out debt denominated in USD. They have to repay in USD.
I agree that there is no near-term possibility of the dollar losing it’s status. Sure, over time, maybe, but slowly and probably over decades. Heck, we haven’t even seen the fallout yet from all the insolvencies that are starting to happen. When people firms go under and their loans are in USD, they are going to try to grab USD. The USD could yet experience a significant increase in value before the the economic impacts of the COVID shock finish playing out.
Great insight