King Dollar Abdicates The Throne

Back in March, I wrote of the “Black Swan in Plain Sight” that was King Dollar:

“Based on Taleb’s criteria, it would seem that the Dollar’s advance over the past nine months would qualify as a Black Swan event. If King Dollar is indeed a Black Swan, though, why haven’t we seen reverberations in the U.S. equity market? Probably because it has not yet been elevated to that status among the consensus. Similar to how stocks ignored the initial decline in housing in 2006-07, the stock market is dismissing the abnormal strength in the Dollar.

The bullish narrative that has supported shares has been that a strong dollar is a positive because it means U.S. growth is booming. A quick examination of the facts, though, dispels this notion as U.S. real GDP growth in this expansion continues at its slowest pace in history.

The truth is that the Dollar is strong this time around not because the U.S. economy is booming but because Europe and Japan (the largest components of the Dollar Index) are intent on crashing their currencies. For now, many still seem to believe this debasement and global currency war is a rising tide that lifts all boats, but should weakness in U.S. macro data and earnings continue, this belief may be tested.

With extreme volatility in currencies, commodities, and bonds, it would seem to be only a matter of time before we witness a spillover to equities. And with the Dollar’s black swan advance occurring before the Fed has even removed the word “patient,” we can only imagine what volatility will ensue when they actually raise rates.”

Fast forward to today and much has changed. U.S. equities suffered their largest correction since 2011, earnings and economic growth have weakened, and the bullish narrative behind prior Dollar strength has faded.

After hitting the highest level since 2003 back in March, the Dollar Index has gone nowhere fast and is actually down over the past nine months.