Our Contrarian View on the Dollar
We see no reason for the US dollar’s extreme strength since its May bottom, and expect it to be reversed. The present rally began, to the day, when Trump clinch the GOP nomination, and reaccelerated after the election – but we don’t see that connection as justifying the rally, especially as Trump’s protectionist agenda calls for a weaker USD. Neither do we see a connection with post-Brexit flight from EUR, as USD has appreciated just as much against JPY. Arbitrage arguments about higher relative long-term yields, inflation expectations, and Fed rate hike expectations don’t hold up – the magnitude of the USD rally is out of all proportion to any of those potential drivers. With oil having more than doubled since February, USD should by all historical precedent be weaker, not stronger.