30 Apr 2015
The dollar bull market in perspective – BBH
FXStreet (Barcelona) - Mark Chandler, Global Head of Currency Strategy at Brown Brothers Harriman, presents the case of the dollar bull rally using the price action against the euro.
Key Quotes
“In a larger sense, this is the third dollar bull market since the end of Bretton Woods. To put this bull market in perspective, we use the euro (and its equivalent prior to 1999), which corresponds closely to the US broad trade-weighted index as a proxy. During what can be calling the Reagan dollar rally, the euro’s equivalent depreciated by almost 60%. During what can be dubbed, the Clinton dollar rally, the euro depreciated by 45%. The Obama dollar rally has seen the euro depreciate 35% from its 2008 peak near $1.60.”
“If the Obama dollar rally were to match the Clinton rally, the euro would trade toward $0.8800. If the Obama dollar rally were to match the Reagan rally, it would fall to $0.6400. We have tended to discount a repeat of the Reagan dollar rally because the policy mix will not be as supportive as it was under Reagan and Volcker and US leadership seems weaker.”
“Even if the dollar still dominates the global economy, there are a greater number of alternatives. At the same time, the prolonged divergence and the negative interest rates in Europe and unprecedented pace of monetary easing in Japan warns that the overshoot might be larger than what was experienced under Clinton.”
“Both the Reagan and Clinton dollar rallies ended with coordinated central bank intervention, which is to show that the trends take a life of their own and can be sustained for years. There are different phases of the dollar bull market. The next leg up likely requires a stronger sense that the Fed will get the opportunity it is looking for, and European rates continue to go where no rates have gone before.”
Key Quotes
“In a larger sense, this is the third dollar bull market since the end of Bretton Woods. To put this bull market in perspective, we use the euro (and its equivalent prior to 1999), which corresponds closely to the US broad trade-weighted index as a proxy. During what can be calling the Reagan dollar rally, the euro’s equivalent depreciated by almost 60%. During what can be dubbed, the Clinton dollar rally, the euro depreciated by 45%. The Obama dollar rally has seen the euro depreciate 35% from its 2008 peak near $1.60.”
“If the Obama dollar rally were to match the Clinton rally, the euro would trade toward $0.8800. If the Obama dollar rally were to match the Reagan rally, it would fall to $0.6400. We have tended to discount a repeat of the Reagan dollar rally because the policy mix will not be as supportive as it was under Reagan and Volcker and US leadership seems weaker.”
“Even if the dollar still dominates the global economy, there are a greater number of alternatives. At the same time, the prolonged divergence and the negative interest rates in Europe and unprecedented pace of monetary easing in Japan warns that the overshoot might be larger than what was experienced under Clinton.”
“Both the Reagan and Clinton dollar rallies ended with coordinated central bank intervention, which is to show that the trends take a life of their own and can be sustained for years. There are different phases of the dollar bull market. The next leg up likely requires a stronger sense that the Fed will get the opportunity it is looking for, and European rates continue to go where no rates have gone before.”