Dollar Decline - Policy Words and Actions Suggest Weakness

The dollar, as measured by the DXY index, is at lowest level in almost three years. The consistent decline has been in place since the March liquidity crisis when the Fed opened swap lines, increased the money supply, and cut rates. The Fed action averted a global liquidity crisis, but the dollar has fallen well beyond beginning of the year values.

The question with a new administration is whether there will be a strong or weak dollar policy. The dollar, of course, is a relative price between monetary and economic fundamentals between two countries, yet policy will drive expectations. The choice set is between a strong or weak policy rhetoric and strong or weak policy actions. These can either be consistent or inconsistent. Consistency of policy and actions will drive trends. 

Consistency of words and deeds suggest that the dollar will be weaker. While recent opinion pieces have called for a strong dollar policy, former Fed chairperson Yellen had a bias for a weak dollar, so we don't expect a change in her bias if she is Treasury secretary. The Trump administration was tilted for a weak dollar to improve exports. A strong dollar policy from a Biden Treasury would be an unlikely change in direction. The fundamentals, with continued loose Fed monetary policy, also suggest a weak dollar. Expect the current dollar trend to continue.