Why the US Dollar’s Strength Could Continue

Talking Points

• US Dollar Near-Term Strength
• Playing the Political Trump Card
• Potential Risks to the US Dollar

US Dollar Near-Term Strength

According to the team, there are several factors contributing to the US dollar's current strength. Significant carry dispersion, US exceptionalism and AI-driven investment narratives all align positively for the dollar in the near term. Furthermore, investors are heavily overweight in US dollar assets, despite the greenback being overvalued in purchasing power (PPP) terms. This trend is expected to persist for some time, providing support to the US dollar's upward trajectory.

Contrasting Fortunes in Other Currencies

While the US dollar pushes higher, other major currencies are struggling. The Japanese yen for example is currently sat at 160 USD, down 12% year-to-date and at the other end of the carry trade spectrum. Negative real yields and ongoing Bank of Japan (BoJ) interventions mean the yen is likely to continue to remain soft into year-end. Similarly, lower-yield currencies like the euro, Swiss franc and Chinese yuan are providing tailwinds for the US dollar by serving as funding currencies.

Playing the Political Trump Card

Political and economic factors could also further bolster the US dollar. If former President Trump were to be victorious in the coming US election in November, industrial policy shifts and the potential imposition of trade tariffs could come into effect. Historically, we can see that tariffs are dollar-bullish, as seen in 2018 and in the lead-up to Trump’s election in 2016.

Chinese Economic Weakness

A weak Chinese economy and yuan along with record US oil and natural gas production is also bullish for the US dollar, enhancing its safe-haven status. In what may prove to be a case for segregating geopolitical narratives from economic research, the US growth story has turned out better than expected, while the Chinese growth story has worsened. China faces intense pressure to cut interest rates to promote a positive growth outlook and stem significant capital outflows.

Potential Risks to the US Dollar

Despite its current strength, there are several risks that could shift the tide against the US dollar. For example, a slowdown in economic growth, coupled with an acceleration in Europe and China would weaken the dollar. Equally, a reversal of heavy US long dollar positioning would have a similar effect. As would the substantial fiscal deficit, currently at 7% with little chance of consolidation, which could be seen as pro-cyclical, potentially exacerbating the economic cycle by adding unnecessary stimulus during times of economic strength.

The StoneX Strategy Team View

At present, the Strategy Team sees value in long dollar index (DXY) positioning. It offers a robust pathway for playing market dynamics and offers diversification benefits. That said, investors should be cautious of long-term risks to the US dollar, including a potential breakdown in US exceptionalism, USD valuations, and investor positioning.

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