I don’t believe there is an inherent reason for a dollar cycle. The evidence, at least from the chart, suggests a pattern in the dollar’s behavior. No, there may be movement away from extremes, a form of mean reversion, such that if the value of the dollar gets high, policy, trade, and capital flows will reverse and cause a change in trend. We should see this more clearly through a valuation model or with the dollar’s real value. Of course, extremes in the dollar will also be affected by the behavior of other countries, since an exchange rate is a relative price. But for now, let’s take the chart at face value, which suggests the dollar has been on a ten-year strengthening run that is reversing. This change started in 2024 and looks to continue. From a policy perspective, high inflation in the US relative to many other countries suggests a decline that will continue until the Fed can get back to its 2% target and show it is committed to taming inflation. Second, the declining dollar is linked to falling Treasury safety, which will require better control of the US federal deficit.
The dollar has no inherent cycle. However, policy behavior may follow a cycle.
