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What’s down with the Dollar?

Market Commentary

16 August 2017

Quantitative Easing (QE) was the largest and most distortionary intervention ever made in global bond markets and it particularly favoured US markets. The Dollar rallied sharply as capital flowed into the US, but the Dollar eventually got expensive and investors got saturated. As the Fed began to tighten policy the QE tsunami began to lose strength. Contrary to popular perceptions the real challenge for the Dollar is not low Fed funds rates, but rather pregnant positioning and the fact that the Greenback is expensive in both real and nominal terms. In the context of still sluggish growth and excessive debts investors are slowly realising that the QE-motivated tide, which pushed the Dollar well beyond its fair value, is now turning. We described this dynamic in “The View from Kilimanjaro” in September 2015 and the dynamics are still highly relevant, in our view. Early movers out of the Dollar and back into EM currencies will be generously rewarded, in our view.

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