USD Trend Watch
The US dollar (USD) has been highly volatile in recent weeks and months. Since the start of December, the DXY index peaked at 87.70 on 4 December 2008, fell to a low of 77.69 on 18 December 2008, then rallied to a high of 89.62 on 4 March 2009, fell to 78.33 on 2 June and since then has been trading between 81.47 and 79.19.
Base Case:
USD was massively undervalued against G10 currencies as of June 2008
USD is now roughly fair value against G10 currencies, overvalued against EM currencies
USD remains in a multi-decade downtrend
USD will see a further multi-year period of gradual weakness….
…until US inflation expectations spike, at which point higher rates will boost the USD
USD declines are typically gradual – the DXY has NEVER fallen over 30% in a single year
G10 currencies have typically led rallies against the USD…
…but there are strong arguments for expecting EM currencies to lead this time
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