Thread by @BobEUnlimited

In a world full of stagnation, over easy monetary and fiscal policy is counterintuitively dollar positive.

Policy juicing of the economy drives more capital to the US taking advantage of higher relative yields and stronger expected growth, pushing the dollar higher.

Thread.

The dollar made new highs today for the year on DXY and has been on a tear over the last 8 weeks. It started just after the Fed re-wrote the reaction function in Sept to pursue over easy policy, and has since been reinforced with policy expectations post-election.

This market action is confusing to some extent because the view that easier monetary policy and easier fiscal policy would be dollar supportive was pretty non-consensus at the time, but has played out largely as expected as part of the "over easy" trade.

https://x.com/BobEUnlimited/status/1836884469967368579

What is striking move is the move is across nearly all major global currency pairs. Euro is making lows of the year, as growth stagnates and the ECB is in line to keep cutting to prop up the economy.

So much for the breakdown of the JPY carry trade which never actually existed. Instead the USDJPY is doing what you would expect, pushing back toward new highs as US yields rise and expectations of the BoJ's shifts to tighten meaningfully fade into the background.

The UK has been a tad stronger and the BoE more reticent to cut, and still GBP has fallen to the nearly lows.

CNY has totally reversed the trend and is back to falling again. Not helped by the fact that conditions remain very depressed, policy makers have failed once again to deliver any meaningful support, and the US election outcomes are likely economically antagonistic.

The dollar is rallying sharply against CAD to highs of the year as the BoC (correctly) cuts quickly to try to prop up the weak economy.

Other than acute periods of GFC and Covid, CAD hasn't traded this low since I was drinking beers at 50c on the dollar in Windsor at 19.

And AUD back to close to 20 year lows against the USD.

The peso also pushing back to lows not seen in history other than during the acute moments in covid. While there is a lot of focus on post-election related dynamics, the nearby push higher actually started just after the Fed meeting.

Gold has fallen by 7% since the election which has been roughly 50/50 removal of the election risk premium and about the post-election dollar pop higher. It has reversed the full post-Fed meeting rally as a result.

This broad based rise in the dollar aligns near perfectly with bond markets digesting the combination of easier Fed policy and then more pro-growth fiscal policy ahead. Taken together yields have moved up more than 80bps, reflecting a much stronger US economy ahead vs expected.

Its not just in the bond market, it is also in the stock market where US stocks have *significantly* outperformed the rest of the world since the Fed meeting and then further reinforced by the election outcomes.

In any longer-term context of price action, dollar at this point is roughly near all-time highs relative to trade partners.

At the same time, with much higher US yields, markets are pricing in a long-run fall in the dollar back below LT averages in both real an nominal terms.

The magnitude of US exceptionalism in the past couple years has shocked most investors who have been burned by leaning on global diversification in their portfolios.

But as we look ahead, US relative strength looks set to continue as over easy policy pushes divergence ahead.

While these currency moves look big up close, they are modest compared to what could be the accumulated productivity, monetary policy and fiscal differences over the next decade.

As a result, it is time to start wrestling with the implications of a new super-dollar era ahead.