When do I Fade the Strong Dollar?

The dollar is quite strong right now for a few reasons.

1:  Highest interest rates in the developed world. 

2:  Flight to reserve currency (uncertainty from war)

3:  Poor moments in the alternatives (Euro looking at stagflation economy, Japan still keeping interest rates low – even in the face of an improving business environment)

All this said, the U.S. has some problems of its own but is the cleanest dirty shirt in the cabinet.   And there is the possibility that some of the political issues in the US could start to hurt the currency. No signs of this yet.

Another strike against the dollar is purchasing power parity basis (how much comparable but non exportable products cost).  The U.S. is nearly as expensive relative to the rest of the world as it has been in memory.

What am I doing?

I’m taking this opportunity to cover any non-USD currency shorts I have in my portfolios just in case a catalyst hits.  And, because I actually live purchasing power parity.  I am buying Euros to cover my European spending through the end of next year.  But I’m not yet ready to short the USD.  The key to that opinion changing will require a change in the global differentials in real rates (rates in excess of inflation.) 

Currencies I’m watching to buy vs. short USD but waiting for a catalyst:
Australia Catalyst – hard core inflation fighting.  Catalyst: Global peace with China breaks out.
Swiss:  Catalyst:  Rates go above inflation.
Euro:  Sudden economic turnaround or interest rates above USD rates.  (I seriously don’t expect this anytime soon).
Yen:  10-year JGB (government bonds) go to yield of 2+%

COUNTRY                            INFLATION%      2-YR BOND%      Real Rate%

Australia                              6.0                          3.9                          -2.1
Swiss                                     1.7                          1.1                          -0.6
Eurozone                             4.3                          3.1 (Ger)              -1.2
Japan                                    3.2                          0.1                          -3.1
US Dollar                             3.7                          5.0                          +1.3

Source: Bloomberg/Bureau of Labor Statistics as of 9 Oct 2023.

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