“The USD ‘wrecking ball’ is again the world’s problem,” Nomura’s Charlie McElligott said Thursday.

A week on from “Return Of The Wrecking Ball,” dollar implacability was “the primary gripe” emanating from the IMF-World Bank meetings in Washington, Charlie wrote, noting that Janet Yellen was compelled to acknowledge the “serious concerns” of Japan and South Korea, where officials are vexed by persistent currency weakness.

Yellen’s endorsement of a joint statement with Japanese Finance Minister Shunichi Suzuki and South Korean Finance Minister Choi Sang-mok was generally viewed as a green light for limited intervention. “I hope you will read the statement as it is,” Masato Kanda, Japan’s FX sentinel and a known quantity in market circles, said. “It is ‘serious’ concerns rather than ‘ordinary’ concerns.”

Yes, “serious concerns” like the ones I raised in the linked article above and also in the Weekly, in which I took a trip down memory lane to September of 2022, when a harrowing bout of dollar strength wreaked havoc. The situation isn’t that “serious” yet, but as McElligott put it on Thursday, “the ‘US exceptionalism’ trade is at increasing risk of causing issues [for] the rest of the world.”

The Bloomberg screencap below from Charlie gives you a sense of the situation. We’ve just seen the largest eight-session move in DB’s CVIX since — wait for it — September 2022.

“This increasing fragility within the FX space is growing more evident, particularly with a few days of sharp reversals in crowded carry proxies,” McElligott went on.

What’s driving this? Well, the specter of monetary policy divergence most obviously. The US economy refuses to so much as bend, let alone break, quite possibly because neutral’s higher than the Fed’s willing to hike to. That, in turn, promises to keep the FOMC parked at terminal in perpetuity.

There’s more than a little irony in that: The Fed’s reluctance to go the extra mile to a higher near-term r-star may mean they have to stay camped at high altitude longer than they’d ideally like.

Dollar positioning’s stretched. The figures below show CTA exposure and also the CFTC net long. The latter’s 100%ile on a one-year lookback, and the former’s basically there on a longer window.

Plainly, that argues for a reversal (i.e., a pullback) in the event of coordinated intervention or just some dovish US macro catalyst.

But whatever happens in the very near-term, it won’t undermine the multi-faceted dollar bull case, which McElligott walked through on Thursday using a series of bullet points.

The dollar, he said, “has been ’10 feet tall and bulletproof’ for myriad reasons,” including:

• [The] prolific global growth divergence, with the impervious US economy being supercharged by ‘run-hot’ fiscal policy, huge deficits and [an] immigration surge, which in turn is driving a powerful resumption of the ‘high for longer’ US rates trade
• Capital flows into US exceptionalism, especially considering the proximity to the US tech / AI ‘perpetual growth’ machines

Those are the main drivers, but Charlie also mentioned a more nuanced argument that I’ve advanced in these pages repeatedly: The dollar now exhibits “pro-cyclicality with energy.” That’s a real problem for the rest of the world, or at least for energy importers. If your currency’s weak as a result of dollar strength at the same time that dollar-denominated energy prices are rising, you’re in a tough spot. The US, on the other hand, isn’t just energy independent, it’s now an exporter.

And then, of course, there’s the flight-to-safety bid. The scarier things get, the more demand for dollars, typically in the form of benchmark Treasurys, but do note: In an honest-to-God crisis, people want actual cash USDs, accept no substitutes. Recall that during March of 2020, everything that wasn’t tied down — from stocks to Treasurys to gold — was liquidated to raise literal USD cash.

Standing behind it all is what McElligott described as the “structural” case for the dollar, which is to say the reserve currency case. That, he noted, rests on “political stability [and] military hegemony,” among other things.

Fortunately, there’s no sign America’s becoming less stable politically, nor is anyone stepping up to challenge the US militarily.

[Insert wink emoji]