Is A Weak US Dollar A Key Macro Theme For 2021?

The world’s reserve currency has been weakening since May and recent trending behavior suggests the slide has room to run and so it’s time for a short recap of the implications and the outlook for what could be a major driver of investment results in 2021.

Let’s start with the elephant in the room: the downside momentum. The US Dollar Index (USD) slipped to a new 2-1/2 year on Tues., Jan. 5. The 89.4 close (based on daily data) is lowest since April 2018. Using the index’s 50- and 200-day moving averages as an initial guide strongly suggests that a strong downside bias still prevails.

The dollar’s decline in recent months marks a dramatic reversal in a short period, but over the longer run forex volatility tends to be a wash. As a rule of thumb, the expected return for forex risk is zero, at least on a buy-and-hold basis. You can certainly earn outsized returns (or lose lots of money) in currency trading, but in the long run forex risk is, in theory, a wash in terms of generating a risk premium.

The theory tends to align with history through the decades from a dollar perspective vis-a-vis the major currencies on the other side of the ledger. Consider, for example, how USD compares since 1990: Lots of volatility, and several periods of extended trending behavior (up and down), but the current value of the index hasn’t changed much over the past 30 years.

Nonetheless, there are compelling reasons to argue that the greenback will continue to slide in the foreseeable future. As a number of observers have been pointing out recently, the stars appear to be aligning for a continued decline in the buck. Consensus may be a risk factor: collective “wisdom” can be a sign of excess and therefore ripe for reversal. Nonetheless, the greenback’s trend and several macro factors still favor the view that the dollar will continue to weaken. Here’s a quick recap of several points that are animating dollar bears:

1 2 3
View single page >> |

Disclosure: None.

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.

Comments

Leave a comment to automatically be entered into our contest to win a free Echo Show.