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Claustrophilia's avatar

I fail to understand Robin Brook’s point #2, to which he ascribes the most importance for the current behavior of the US currency. This is not the first time he has pointed out the negative correlation between the dollar’s exchange rate value and the strength/weakness of US data. His reference to the period immediately following the GFC confuses me still further, not the actual phenomenon of the correlation but the economic logic for it.

Why would the dovish Fed then (and now) be good for the US currency? And vice versa? Is this a liquidity argument, that not just low rates but the full panoply of facilities that the Fed makes available that bolster risk-asset markets and hence keep demand for the dollar strong? And a hawkish Fed will crimp these valuations and so trigger a flight out of dollars? Please explain.

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CoTTrader's avatar

I see it very similarly. In my view, the Dollar has recently come under pressure due to political chaos, which has led to a temporary loss of confidence—particularly among international investors. That explains at least part of the recent weakness.

However, I see this more as a short-term overreaction. Once the political situation calms down—which it usually does at some point—sentiment should normalize. In that kind of environment, there’s a good chance we’ll see a rebound in the Dollar. The latest news out of China could even serve as the trigger for that reversal.

What’s also interesting from a sentiment perspective is that retail positioning is currently very bearish on the Dollar. That, too, often acts as a contrarian signal.

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