USD

According to the precepts of Stephen Jen’s “dollar smile” theory, the greenback tends to rise in value during periods of extreme economic performance – on both ends of the spectrum – and fall in value during periods when the US is growing more slowly than its global counterparts. It seems that just such a “muddle through” scenario is set to unfold, with all of the major components of domestic demand showing signs of exhaustion after an outsized post-pandemic recovery. Fiscal policy at the state and local levels is still providing unexpected stability, and aggregate incomes are rising more quickly than...

In the aftermath of the 2008 global financial crisis, households and businesses in the United States deleveraged, and have thus far managed to keep debt levels relatively restrained. In contrast, private sector leverage has risen spectacularly – in both absolute and momentum terms – in countries like Australia, Canada, South Korea, and France, and in smaller economies like Denmark, Norway, and Sweden. In China, decades of unproductive investment and unrestrained credit creation have left policymakers struggling to manage ballooning debt burdens across the financial system. If global liquidity conditions worsen and borrowing costs remain stubbornly elevated, we suspect these vulnerabilities...

The greenback remains deeply overvalued against the euro, pound, and yen. We think the correction that began last year will continue to unfold over the next 12 months, with the trade-weighted exchange rate underperforming relative to the world’s biggest economies. But we don’t expect this decline to prove as fast-paced or as sustained as the consensus would suggest. We’re not convinced the Fed will cut rates before May 2024, and we think long-term yields could remain remain relatively elevated as liquidity ebbs and quantitative tightening efforts continue. This could mean that the dollar maintains positive real carry relative to currencies...