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Why should the dollar go down?

| Posted by: Paul Donovan | Tags: Paul Donovan Weekly

  • US Fed Chair Powell's chat with Congress hinted at four US interest rates hikes this year. Euro area interest rates are unlikely to rise this year. With a growing gap between US and European interest rates, why should the dollar go down?
  • Foreigners set a current account deficit currency's value. If foreigners do not fund the deficit, the currency goes down (until it is cheap enough to attract funding). The US runs a large, growing current account deficit. Recent US policies will make the deficit worse. US tax cuts give Americans more cash. Americans buy imports. Thus, America needs more funding from foreigners.
  • Will higher US rates bring in the funding? No. Interest rate flows are not that important. Forty years ago, interest rate flows were really all that mattered. Now, direct investment and equity flows matter more.
  • The dollar is missing some big buyers. When central banks build foreign exchange reserves they buy dollars. Central banks are not building foreign exchange reserves. When oil prices are high, the Middle East buys dollars. Oil prices are not high.
  • America needs more and more funding. The big buyers are missing. Interest rate flows are less important. The dollar goes down.