All Eyes On The U.S. Dollar – Chart book by Evergreen Gavekal
In this month’s EVA Chartbook, we’re exploring one of the most important and timely questions in the investing world today. Is the US dollar bull market running out of steam or gearing up for another disruptive run?
As you can see in chart to the right, the dollar bounced around in a relatively tight trading range for more than five years after the global financial crisis and then exploded by roughly 25% in the second half of 2014.
If there was any doubt, it is now clear that stimulus in Europe and Asia is not the same as stimulus in the United States. When foreign central banks ease against the backdrop of a tightening Fed, that “divergence” drives the world’s still-dominant reserve currency higher with immediate and profound implications for almost every market and asset class.
Over the last 18 months, we’ve seen a sharp collapse in commodity prices and emerging market currencies, a significant jump in credit spreads, waves of risk aversion in major equity markets, and an alarming slowdown in global economic growth. Few economists disagree that another dollar surge could destabilize the global system in even more profound ways, but the real question is whether this powerful trend has run its course.
While the divergence between major central banks likely has limited room to run (given the tightening we’ve already seen in the United States), it’s not hard to imagine another 10% to 15% rise in the trade weighted dollar with a little help from the Fed, the European Central Bank, the Bank of Japan, and the People’s Bank of China.
That, in our opinion, is where the rubber meets the road. Eventually, divergence will give rise to convergence as a slowdown (or outright recession) in the US leads to an about-face in Fed policy. While history suggests the dollar could spike further in the event of a global panic, eventually the greenback’s reversal should lead to a reflation in commodity prices (especially energy), a calming in credit spreads”, a recovery in major equity markets, and a re-acceleration in global growth.
Let’s dive right in.