The Future of The U.S. Dollar

Had an interesting conversation with The Dealer out of Hong Kong last night. We were both glued to our screens waiting to see what would happen with the Shanghai equities markets. I like chatting with this guy. He never tells me market theories, but he will tell me what players are doing. Size, timing, targets and such. It's incredibly interesting information in its own right, regardless of my own market take. He asked what I really felt about economies around the world, and how the U.S. dollar will play out.
Here are my long-term thoughts on the U.S. dollar going forward:


First, the economy continues to surprise to the upside here in the U.S. The unemployment rate is still very strong, and with last week's durables coming in with a healthy revised increase for March, I'm thinking that the GDP release will push to the upside.


There's one missing ingredient with the U.S. economy so far, and that's consumer spending. Incomes are increasing rapidly. But, the spending that should be associated with that hasn't shown up yet. I think that's a matter of time, because I don't see any reason for the U.S. consumers to all of a sudden change their savings habits. That should continue to support the U.S. economy. We just had two reports of confidence come in healthy. Confident consumers translates into confident shoppers. That translates into the missing ingredient.


Interest rates are still relatively low when looked at historically. The 10-year is still below the 5.000% level, but that could go by the end of summer, however. There's still plenty of liquidity around to encourage growth. As for the decline in the real estate market, that's kind of a non-event up to now, and I don't see any reason why the economy could spin out of control from one sector that was over-inflated.

In all, I see a lot of reasons to buy the U.S. economy, and therefore the U.S. dollar.

But, to play the dollar, you have to compare it against its counterparts.

The U.S. dollar was the JPY carry of the early 2000's... you know, when our own interest rates were down to nothing? The greenback took it on the chin for several months. Now, interest rates are some of the highest in the world. The reasons to sell the greenback like a used hooker are gone. Not enough profit potential to push large market players to really go hard against it.

To have a take on the U.S. greenback, you also have to have a take against other currencies. I've read blogs from beginner traders where they focus only on one currency in order to learn the finer elements. That's like looking at a pinky and saying the entire body is healthy. You take that approach, I'll go over to your place and eat your lunch right at your desk.

Looking at the U.S. dollar gets to be a little tricky.

I think the reason to push the EUR and GBP higher are gone. We're basically at parity with rationale in these currencies. There's an edge vs. EUR for now. But, it's not a big one, and I don't see any reason for it to narrow. If the U.S. economy continues to push higher, along with confidence, then we're going to see all of the long-term sellers hitting the "take profit" buttons soon. That will boost the U.S. dollar off of its all-time low ranges. I don't know that we'll go too far from these levels. But, some profit taking is just around the corner.

At the same time, I see the renewed interest in the U.S. dollar pushing USD/JPY higher. This will make for an interesting balancing act with the carry trade. It'll go just about nowhere as USD/JPY goes higher and USD/vs. goes lower. As long as there's no reason to sell profitable trades, then the carry should continue. But, what if the Bank of Japan gets even more aggressive? We are pretty certain that there's an interest rate increase hitting the wires in August, after the elections. But, beyond that, no real certainty. If the BoJ keeps pounding their chests, the USD/JPY could sell off. That could push the carry lower across the board, pushing the USD higher vs EVERYTHING. That's the one catalyst that I'll be watching at the end of the summer. Until then, I'm all systems go with the carry.

In all, I like the USD, and have been a big buyer over the course of the last few weeks. It's worked like a champ. I'm going to continue with that approach going forward looking for big moves. I normally don't play for bigger moves. But, I think we've got a hot summer in store for us. And the headline may very well be the USD.

David Andrew Taylor

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