What’s Up With The Dollar? One Bank ‘Explains’ The Greenback’s Trials And Tribulations

Ok, I’m going to stay largely out of the “impossible trinity” debate re: higher stocks, rising bond yields, and a weaker dollar because i) nothing is “impossible” (I mean after all, make-believe space tokens were trading at $20,000 just over two months ago), and ii) there are factors at play here that are unprecedented in terms of both the disparate pace of stimulus unwind across advanced economies and lunatic U.S. fiscal policy that’s throwing a monkey wrench in everything. On top of that, there’s the whole issue of reserve diversification and that’s probably going to become an important longer-term story, especially if the administration continues to make economic enemies.

Deutsche Bank had a pretty succinct take on the dollar out last week which you’ve probably seen. Really, there wasn’t a whole lot to it and maybe that’s the beauty of it – elegance is often to be found in simplicity. If you missed it, DB attributes dollar weakness to the following two factors:

US asset valuations are extremely stretched. Simply put, U.S. bond and equity prices cannot continue going up at the same time. This correlation breakdown is structurally bearish for the dollar because it inhibits sustained inflows into U.S. bond and equity markets.

Irrespective of asset valuations the U.S. twin deficit (the sum of the current account and fiscal balance) is set to deteriorate dramatically in coming years.

So there’s that.

Well on Tuesday, the greenback is higher for a third day, which is notable considering that last week looked like it might mark the end of the nascent bounce off the Mnuchin-inspired lows.

For whatever it’s worth, Goldman is out with a “Q&A” on dollar weakness and it’s probably worth highlighting a few excerpts.

First, Goldman notes that there’s nothing particularly unusual about the dollar weakening as the Fed hikes. “Of the six tightening periods since 1980 (including the current one), half have been associated with Dollar strength and half with Dollar weakness,” the bank writes.