Last but not the least, a weak currency (i.e. weaker dollar) typically leads to inflation, because it costs more to import goods and services. The Federal Reserve wants inflation. Core PCE – its favorite measure – has been stuck below two percent since April 2012, although it has been inching up since last August, on pace with the rise in core CPI (Chart 5).
As a debtor nation, it pays to ignite inflation, as it erodes away the value of the debt.
To what extent Janet Yellen succeeds in driving down the value of the dollar remains to be seen. The US Dollar Index (94.82) has been trading within a declining trend line since early December last year. The Yellen-fueled drop has dropped the index right on rising trend-line support from May last year (Chart 6).
Two things are worth consideration.
One, watch non-commercials if they begin to fade the current pessimism toward the greenback. Last week, they raised net longs in US dollar index futures just a tad, but this was the first increase in seven weeks. The mid-March holdings were the lowest since June 2014. That was when they began to build net longs (Chart 7).
Second, back in March last year, the dollar index peaked amidst peak optimism. It seemed no one was left to be a bull. In hindsight, all that optimism was already in the price.
We recently witnessed a similar phenomenon as relates to the euro and yen – though at a smaller scale.
On March 10th, the ECB announced a whole host of stimulus measures, seeking, among others, to drive the euro down. The latter, however, rallied 1.6 percent on that day and another 1.4 percent since.
Similarly, on January 29th, the BoJ adopted negative interest rate policy. The yen fell 1.9 percent that day, but that also marked a bottom. It has rallied 7.7 percent since.
The point is, Ms. Yellen did not deliver her speech when the dollar index was at 100, rather when it was at 96. It is possible the index was already anticipating a dovish message. If so, rather counterintuitively, it can rally from here – duration and magnitude notwithstanding.
Thanks for reading.
Further reading: “Are Stock Market Valuation Metrics Unwinding From Their Highs?“
Twitter: Â @hedgopia
Read more from Paban on his blog.
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
