US dollar continues the slide on all fronts. What to watch for

Not much adds up about today’s US dollar selloff.

For one, it’s rare to see the dollar lower right across the board. Generally, if there’s a risk-on or risk-off day, you’ll get an outlier like USD/JPY. Today though, the dollar is even down 25 pips against the yen and is making new lows as I write at 115.56.

What we’re seeing today is probably flow drive but it’s also a microcosm of the ‘dollar smile’. The idea is that the dollar tends to do well at the extremes. When there’s fear, the dollar rallies on its safe haven status. When the economy is roaring — like after the pandemic — the dollar also strengthens. It’s when it’s in the middle where it softens.

I would say this graphic oversimplifies it and it’s better said that the dollar appreciates in times of crisis, tends to weaken when the global economy
is healthy and strengthens again when the US outperforms.

In the pandemic we went from the ‘crisis’ side to the ‘outperformance’ side very quickly. Soon, we will be seeing the rest of the world catch up.

I suspect it will be on days like today where we continue to see this kind of move. Stocks are soft, people are skeptical of US tech and volatility is low. Normally, the pickup in rates would help the dollar but those other factors are outweighing it, in part because bund yields are threatening to go positive.

Bund yields

Overall, I’m negative on the US dollar in 2022 because I believe in a continued rebound in the global economy. The big risk to that is omicron in China but we will just have to wait for that to unfold.

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