First of all, apologies for being late with this article - frankly, I had little macro inspiration at the weekend, so prefer to wait until I see an interesting theme or trend to discuss.
The theme here is the US Dollar, which is the most important currency in the world, given its role as the de facto world reserve currency and the currency in which the majority of commodities and trade is transacted.
The background: the end of a long US Dollar upcycle
We can see clearly from the chart of the Bloomberg US Dollar index below (measuring the US dollar against a basket of currencies including euro, sterling, yen, Chinese renminbi etc.) that the US dollar has broken down definitively from a 9 year rising trendline that started following a double-bottom formation back in 2008-11.
US Dollar index: breaking down from a 9-year uptrend
We can look at the reasons behind the end of the uptrend, which includes huge issuance of government debt to fund tax cuts (Trump cut US corporate tax rates heavily in 2017) and now COVID-19 pandemic stimulus measures, resulting in a huge increase in US government debt as a percentage of the economy (measured by GDP), the collapse in US interest rates (in the form of long-term bond yields) and the rise of alternatives to the US dollar including gold and even bitcoin.
The fact remains, the long-term uptrend for the US dollar looks over, and now a long-term downtrend cycle seems to be in place. The debt picture is not going to change whoever becomes the next US President, as both candidates are committed to spending even more money (fiscal stimulus) to boost US economic growth, albeit with different priorities.
I am not going into the details of why the US dollar is declining and is likely to continue to do so, but for those interested in more on this subject, please look at this informative article written by fund managers PIMCO on the US dollar.
Currencies are a story of pairs: for each loser, there is a winner
So for the US dollar to continue to decline, other currencies must appreciate as currencies are expressed as pairs. The obvious candidates here are the euro, the Japanese yen and the Chinese renminbi. While we can see steady downtrends…
