There Is No Alternative (TINA)

TINA remains the single biggest friend of US Dollar reserve currency status

The degree to which market sentiment has turned negative on the Dollar - in just a few months - is breathtaking. What’s striking is the speed with which this shift has happened and the vehemence with which Dollar bearish views are now held.

Today’s post steps back from the helter-skelter of everyday news to ask a simple question: have fundamentals that over the past decade drove the Dollar 36 percent stronger in real terms really deteriorated so hard and fast that this radical swing in sentiment is justified? The answer is obviously no, which means the Dollar sell-off is largely an emotional overreaction that will likely reverse soon.

The current wave of Dollar bearishness has two pillars. The first is a more short-term, cyclical pillar, whereby tariffs damage the US more than the rest of the world. Markets have traded this pillar by driving interest rate differentials against the Dollar, on the belief that US recession will dampen any inflation impulse from tariffs, which in turn allows the Fed to ease aggressively. The problem with this view is that it runs counter to recent data. As I’ve laid out in recent pieces, there are early signs that inflation in the US is about to pick up, while - under the weight of tariffs - inflation is slowing in the Euro zone and China. This kind of divergence in inflation is bullish for the Dollar because it forces the Fed to stay more hawkish than other central banks. This pillar of Dollar bearishness is therefore highly problematical.

The second pillar of Dollar bearishness is more structural and revolves around a loss of reserve currency status. The big problem with this pillar is TINA. The EU is styling itself as the big alternative to the US, but - given the mess the EU has made on Russia sanctions - that just isn’t credible. The chart shows exports from various countries to Kyrgyzstan, one of the main transshipment hubs for Western goods to Russia. The US (orange) and the UK (green) kept a tight lid on this stuff, while countries like Germany (black) and Italy (purple) have seen a transshipment boom that is ongoing. In Brussels, this stuff is an open secret and - more than three years after the invasion of Ukraine - key policy makers continue to turn a blind eye. You can do that, but you can’t then also pretend to be an alternative to Dollar hegemony.

The truth is that TINA remains as strong as ever. The Dollar sell-off is an emotional reaction to what - on the surface - looks like calmer and more coherent policy making elsewhere, especially in the EU. But once you dig just a little bit below the surface, there is nothing that makes the Euro a credible alternative to the Dollar.