In early March, my friend Jay Pelosky made a cogent case Why the World Needs a Weak Dollar. That was when the U.S. Dollar Index (DXY) was very near its multi-year highs. Here was his main point:
there are so few other options to lift the global economy and prevent a global slowdown morphing into a global recession.
Jay’s rationale is completely sound. And the DXY is a few percent lower since March. But headwinds to reflation of global growth have been steadily mounting and only been amplified with the events of last week in the U.K. And faith in Central Banks is waning. Even before Brexit the wrong-way action in equities and currencies in Europe and Japan from NIRP drives that point home.
The uncertainty that Brexit brings to the EuroZone is manifested in the weakness of Sterling, Euro, Yen and the Yuan (trading at fresh five year lows vs the USD). While much of the focus over the last week has been on the EuroZone, the price action in the Yuan should be concerning given its dramatic impact on global risk assets last Summer when the PBOC unexpectedly devalued their currency on August 11th.
If Jay is right that the major risk to the global economy is a strong dollar, the current state of geo-politics, existing pressures on global growth, the ineffectiveness of current monetary policy and need for fiscal stimulus means the prospects for a weaker dollar are dramatically diminishing, and that means a greater risk for global recession.
For now, wake me up if and when the DXY breaks the recent 18 month low from May at $92. In the meantime I suspect we could see a rehash of the volatility from January/February when dollar strength was blamed for declining global growth expectations, collapsing oil and commodity prices that would cause a deflationary spiral and wreak havoc on corporate earnings here in the U.S.:
