Tuesday, December 6, 2022

Dollar trends and regimes

There are long-term trends in the dollar. These trends have been controlled or adjusted at time through intervention. Intervention may work in the short run to arrest the speed of trends, but intervention without a change in policy will result in a direction change. 

The dollar has been on one of its fast uptrends in history, yet we are now seeing a reversal based on the expectation that the extreme monetary hawkishness will be moderated. It is yet to be seen whether this is true, but a reversal in monetary policy will lead to a dollar reversal.

Is this important? Yes, it is critical because an extended dollar rally places stress across all global markets. The Fed is the liquidity provider to the world. The dollar is the oil in the engine of commerce. Regardless of what some commentators think, there is no current substitute that meets the criteria of a reserve currency. This may change but not today and not tomorrow. Perhaps in the future.

A reversal or stability in the dollar will be good for the global economy and relives the pressure that "something might break".


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