The experts, the President, the IMF all say the USD is too strong in here, but managed money say it has room to run North.
So, when will the Dollar Bulls turn to Bears?
Since the trade dispute between the world’s 2 largest economies came to life in March last year, USD has gained more than 3% Vs a basket of 6 peer currencies.
The Buck’s strength does not augur well with President Trump, who is an advocate for a weaker currency to make US exports more competitive.
Monday, the US Treasury labeled China a currency manipulator for allowing the RMB Yuan to weaken beyond a Key mark.
President Trump feels that US trading partners are all working frantically to keep their currencies cheap to gain an edge in trade, especially China.
That has led to speculation that the US government, through the Treasury, could intervene to weaken USD by using the Exchange Stabilization Fund. That fund has approximately $146-B in reserves, according to Bank of America Merrill Lynch, which may not be enough to have a significant impact in a more than $5-T currency market.
President Trump is not the only one who believes USD should be weaker.
The International Monetary Fund (IMF) says USD ought to be about 6-12% cheaper based on near-term economic fundamentals, but structural issues such as the dollar’s position as the global reserve currency make that unlikely.
But hedge funds keep piling up bets that the USD’s run has further to go, as the world appears headed toward a trade-induced pause in growth if recession.
So, in the managed money world being Bullish USD has been a popular trade. Bank of America Merrill Lynch’s July fund manager survey showed USD was the 4th most crowded trade with 49% of respondents saying it is overvalued. The speculative community has been net Long dollars since mid June 2018.
The Bulls say USD could benefit from increasing trade tensions, as it is a safe haven and offers a very liquid store of value, and there are very few alternatives to USD in the event of a full-scale trade dispute with China.
While the trade tension has benefited USD as a safe haven, there is an argument that the trade stress could undermine the Buck because it would have an adverse impact on the US economy.
Analysts say trade tensions could diminish business and consumer confidence as well as tighten financial conditions.
Interest rate futures implied traders fully expect the Fed to lower rates again at its policy meeting in September, after cutting rates last week for the 1st time in a decade, CME Group’s FedWatch showed Tuesday.
The more hostile the US-China trade disputes becomes, the more Bearish it will becoming for USD, we did not see that in the early days of the dust-up. But it is coming.
Plus, increasing US debt will likely weigh on the Buck we believe, as it is hard to really see a Bullish scenario for USD in here even though the US economy outperforms the rest of the world.
The USD has been too strong for too long, the cracks are there.
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