- Lower USD expected for 2020.
- The Fed will have a hard time fighting higher inflation while expanding the balance sheet.
- USD Index rising wedge broke lower pointing to further weakness.
- I do much more than just articles at The Lead-Lag Report: Members get access to model portfolios, regular updates, a chat room, and more. Get started today »
The man who will use his skill and constructive imagination to see how much he can give for a dollar, instead of how little he can give for a dollar, is bound to succeed. – Henry Ford
As the decade comes close to its end, it is time to look back at what happened with the world's reserve currency in 2019 and, more importantly, what is expected from the USD for the year ahead. No easy ride for USD bears this year – will 2020 bring more of the same, or is a reversal in the cards?
Some game changer events might trigger an ample move in the dollar. But equally important in any macro interpretation is not if the USD rises or falls, but against which currencies it does so. The Dollar Index offers a good balance – its weighted geometric mean shows the dollar’s value relative to a few select currencies like the Euro, the Japanese Yen, the Pound Sterling, the Canadian Dollar, the Swedish Krona and the Swiss Franc.
It is viewed by many as the benchmark for the overall USD value. In 2019 it continued the move higher from the previous year, albeit only making marginal highs. It peaked shy before reaching the 100 mark.
One of the recent Lead-Lag Reports I wrote focused on the USD, the Fed, and how inflation puts an interesting twist to the USD. This is something to watch in 2020. The inflation rate ticks up above the Fed’s 2% target for the first time in a year. All of that cheap money and consumer spending were bound to show up sooner or later.
December has seen steady declines in the USD index, indicating that any positive momentum it has been building could be fizzling out. The fact that the dollar has resumed its decline on Monday following the Friday jobs report induced spike suggests that sentiment is shifting to the negative.
The puzzle for many investors comes from the Fed's actions. Higher inflation calls for hawkish steps from the Fed – but that's not happening so far. The Fed keeps expanding the balance sheet, in a process doomed to fully reverse the quantitative tightening started by the previous Fed Chair, Janet Yellen.
The Fed is not the only one inflating its balance sheet. It seems like a global race, with major central banks printing money in a frenzy. UBS expects the European Central Bank (ECB) balance sheet to hit five trillion euros in 2020 on TLTRO-III credits and QE program.
This article was written by Michael A. Gayed. An author on Seeking Alpha and founder of the Lead Lag Report.
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