Why are traders so against the Dollar?

Outlook

We have short-termism in spades. The Fed, ECB and Bank of Japan decided to ignore data and stay on a hawkish hold, with high expectations of hikes in December. Yields fell everywhere as though the hold will be more lasting.

This makes sense in light of not wanting to frighten the horses after hikes in Sept, and perhaps some concern over the growth effects of a hike going into year-end.

But if prices are coming down, why would we need a rate hike in December? We are amazed more people are not asking that question. For the US, even if you think the latest PCE data is somehow aberrant, prices are obviously not coming down, neither by a lot nor fast.

Then there is the Iran war. Trump is rattling swords and the price of Brent is up over $117 on doubts any deal is even remotely realistic. Oil can go over $125-130 as the gloomsters said from the very beginning and supply-chain shortages and inflation will ensue. The good side of this change is demand for and investment in alternative energy.

Then there is the accounting jiggery-pokery of the tech/AI firms. Reuters has a good explanation of one accounting trick—spreading out the cost of chip/construction acquisition. This is the start of that reality-checking… adding to the list of doubts but not yet a conclusive end to the run. There will be more to come. This happens in every mania—as Kindleberger wrote decades ago (Manias, Panics and Crashes)—but it’s when the financial institutions start balking and the “smart money” starts exiting that we get the crash. We are not there yet.

The good side of this re-calibration is relief in sovereign yields from the crowding out effect.

Forecast

It looks like the FX market will take any excuse to squeeze the dollar. Two things: why are traders so against the dollar? Easy—Trump.. He is reckless, incompetent, advised only by sycophants, a liar and grifter, and not to be trusted. In the immediate future, aka one week, he is expected to dispute the midterm elections and cheat every way he can. As in the 2020 election dispute, he will lose all the court cases, but sour the mood as well as cause distractions. It’s ugly. It causes more distrust of the US, already pretty bad because of Trump demands for bribes, tariffs and the war.

Besides, so-called “king dollar” has been overbought for a very long time. It itches. It’s annoying.A key reason for dollar strength is safe-haven status in a turbulent world. Traders don’t like the irony of the US being the one causing the turbulence. And let’s be honest—they don’t like that the US economy is so resilient and robust when the UK, Europe and Japan are so hidebound. Somebody else may have invented the radio, railroads, cellphones, etc. but it’s US entrepreneurs who caught the ball and ran with it. Quick, name one European AI company.

There is something real here, too. US growth in Q3 was due mostly to the tech/AI boom. It’s at risk. We don’t see capital fleeing, but if and when it does, the dollar could be toast. At least some dollar shorter-squeezers must be anticipating exactly that.

Longer-term, the US economy might be in some trouble. Consumption in Q3 was good, but see the real disposable income chart from The Daily Chart. Less real income, less real spending. Credit card and other delinquencies rise. The Fed has a hard time justifying a hike.

Bottom line, the bond gang pretends to believe the Fed for the moment, and yields slide downhill, giving the other currencies a lift. The turmoil in tech/AI equites contributes. But longer term, by which we mean closer to the Dec policy meeting, we will have on-going inflation increases and even greater certainty of the hike. Never mind that everybody else will be hiking, too. The logic points to a dollar recovery. Just remember that logic doesn’t always apply in markets.