Traders need to take actual profits and not just have pretty mark-to-market entries on their books

Outlook

Bloomberg writes “The dollar hit the highest level since November on Tuesday as traders cement views on the Federal Reserve hiking interest rates this year.

“The Bloomberg Dollar Spot Index jumped 0.4% Tuesday, closing the trading session at a seven-month high, as the Fed’s policy outlook increasingly contrasts central banks across the rest of the world. Traders are pricing in nearly two quarter-point rate increases in the US by early 2027. The cost paid to protect against further dollar upside relative to downside over the next 12 months has risen to the highest level in over a year.

“Meanwhile, the euro fell to its weakest point in a year earlier in the trading session as European Central Bank President Christine Lagarde prompted traders to pare back their bets on rate hikes in the region. The yen remained under pressure as the Bank of Japan is seen as not raising rates fast enough to stem the currency weakness, keeping traders on alert for foreign-currency intervention.

“A credible break higher can create self-feeding momentum, but the story needs fresh fuel. For a true dollar breakout, Warsh probably has to deliver an actual hike at an upcoming meeting to prove his hawkish stance was more than an opening act.”

Well, maybe not. Notice the slippery “an upcoming meeting.” The next FOMC is July 29 and after that, Sept 16 and Oct 9. Surely we will have fresh news by then—about the war and about inflation. It’s not inconceivable that inflation will fall, perhaps even by the July meeting, and hawkishness can fade.

This doesn’t mean a dip in hawkishness would necessarily work against the dollar’s favor. Remember, “not even Trump can wreck the US economy.” Broken record: over long periods, the growth of an economy leads the currency. And the US is the only major economy demonstrating high growth rates. The Atlanta Fed had 3.0% as of last week. The eurozone and UK will be lucky to get 1%. Ee the table from an oa outfit named ClearTax.

Let’s add another factor: traders need to take actual profits and not just have pretty mark-to-market entries on their books. They also run out of institutional credit limits. Rallies and routs are never a straight line, although the USD/CAD chart is darn close. And once a correction starts, it becomes a landslide.

Instead of a Warsh validation of the hawkish mode at the Fed, we could get something pointing the other way, like the US debt. Traders are mostly willing to overlook it but it’s a giant black mark on the US report card. Other triggers may be oil going back to $60-65 or some other geopolitical happy outcome.

Okay, improbables, but it usually doesn’t pay to invest too heavily in a single scenario.

Some writers get joy from copying and pasting magazine covers touting some big deal that then reverses in short order and leaves magazines with egg on their faces. The Economist is a favorite target. Current conditions have that smell. A wild card—Trump doesn’t like the strong dollar. What can he come up with to do harm?

Forecast

When everybody and his brother is touting the strong dollar, we need to look twice. The Strait is open, even if the press is surprisingly lax in reporting the actual rise in ships passing out. Risk aversion “should” be abating, but gains against the emerging market currencies (and everything else) say no. 

What happened to “the Strait is everything”? Perhaps the market is paying attention to the strong possibility the US-Iran deal falls apart. Trump can’t/won’t re-start the shooting war, Iran imposes a toll, Iran keeps the nuclear dust, Isreal keeps bombing Lebanon, etc.

Bottom line, the US loses ignominiously. This raises risk-off sentiment because indeed, the US losing so badly really is destabilizing to the world order, such as it is now that Trump took a wrecking ball to it (NATO, Iceland, Venezuela, etc.). Canadian PM Carney was right--the world order is changed forever. 

We use charts to estimate sentiment rather than what fancy analysts say. Actions speak louder. We do have indicators showing the dollar overbought/currencies oversold but there is no rule dictating when that condition gets corrected. Still, don’t bet the ranch.

Tidbit: TreasSec Bessent has an essay in the WSJ titled “Hamilton Inspires Trump’s Economic Statecraft.” After first thinking Trump doesn’t know who Hamilton was and certainly doesn’t possess anything resembling statecraft, you have to read it. After all, Bessent is a smart guy who made millions, even if he is a Trump toadie.

But alas, no. The essay points out that Hamilton touted self-sufficiency and complains that after the US pioneered globalism for the benefit of mankind, everyone started to take advantage of us.

Among Bessent’s remedies: “Third, America must write the rules of the next economy. Economic competition is no longer confined to the movement of goods across oceans and ports. It will be shaped by the platforms, systems and protocols through which commerce flows in the 21st century. In each of these domains, standards can become strategy. If the U.S. and our partners set open, secure, market-based standards, this century’s economy will tilt toward freedom and prosperity.

“Fourth, financial leadership is a central instrument of statecraft. There is nothing accidental about the dollar’s place in the world, and our leadership role comes with enormous advantages. But it also imposes considerable obligations. Sanctions evasion, terror financing, proliferation financing, cybercrime, narcotics trafficking and corruption all exploit weaknesses in the financial system. Treasury’s job is to protect the financial system by rooting out these abuses.”

How about rooting out the abuse of setting the example of the president becoming a multi-millionaire through graft while “serving” in office?