So Much Dollar Bull

According to the Federal Reserve’s calculations, the US dollar in Q1 pulled off its best quarter in more than twenty years. The last time the Fed’s trade-weighted dollar index managed to appreciate farther than the 7.1% it had in the first three months of 2020, the year was 1997 during its final quarter when almost the whole of Asia was just about to get clobbered.

In second place (now third) for the dollar’s best, Q4 2008.

You might be getting the sense that when the dollar goes up only bad things happen, the dollar’s best when the world is pushed to its worst. It doesn’t quite make sense against all this “strong” dollar nonsense that some still take seriously.

Lorie Logan, Executive VP and current System Open Market Account Manager wrote at the end of March the opposite of “we saw it coming.” Jay Powell, as you might be aware, booked himself into appearing on CBS News’ 60 Minutes program last Sunday where he proceeded to tell one blatant lie after another.

Beginning with “so, we saw it coming.” What was “it?” Let’s ask Ms. Logan:

Amid heightened demand for dollar funding, foreign exchange swap basis spreads of key U.S. dollar currency pairs widened significantly and temporarily reached levels last observed during the global financial crisis.

They knew this was going to happen, but they also let it get so out of hand it could only be compared with GFC1? “We were prepared but it happened anyway” isn’t quite the argument you think. Nice try, Jay.

At this point, though, it at least sounds better than admitting they we weren’t prepared at all and that’s why it wrecked everything.

Leave it to FRBNY to provide the counterexample to the progress in the mainstream I noted earlier this week in identifying what’s really behind every financial curtain. While some in the media have correctly picked up on the theme “dollar” shortage, this recognition isn’t quite universal nor has it yet taken center stage at the central bank. The idea of “flight to safety” is still prominent in the dollar’s explanation provided by the Open Market Desk – even though there’s much amiss about it.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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