The Rising U.S. Dollar Poses Risks To The Global Status Quo

Michael Roat profile picture
Michael Roat


  • The U.S. dollar is likely to continue appreciating based on Federal Reserve policy, higher real U.S. yields, and a deteriorating global environment while the U.S. economy decouples and performs.
  • Emerging markets are on the cusp of a currency crisis. This is already becoming apparent in Indonesia, Turkey, Hong Kong, and Argentina.
  • Europe and Japan's data misses are becoming increasingly more worrisome and support their central banks "doing more" or extending easing.
  • China's and more generally emerging market's USD-denominated corporate debt situation poses a major risk as well and bears "close watching" according to Jerome Powell.
  • The closely watched gauges of the global economy, copper prices and South Korean exports, appear to be rolling over.

Despite the somewhat bearish global outlook I am depicting in this article, there is little reason to believe the Federal Reserve will not "look through" a lot happening globally and take care of its own house focusing on the dual mandate of max employment and 2% inflation. I've long called for the U.S. economy to lead the global economic growth cycle and disengage from the global economy allowing the Federal Reserve to normalize while facing global headwinds. Fiscal stimulus on top of an economy operating at full employment with target rate inflation reinforces the Federal Reserve continuing on its current trajectory.

Real inflation-indexed 10-year treasury yields have just surpassed the Bernanke Taper Tantrum highs in 2013. Given the fact that relatively low nominal yields and high inflation expectations are drivers of currency depreciation, the opposite also holds true. Low or stable inflation expectations with rising nominal yields supports a currency appreciating. This is depicted below in the 10-year inflation-indexed security. It is simply, nominal 10Y yields minus market-based inflation expectations. As the inflation-indexed yield goes up, it provides more power for the U.S. dollar to move higher in my view.

Another factor in foreign exchange rates is interest rate differentials. The closely watched U.S. dollar DXY index is heavily weighted versus the euro. The U.S. 10Y Treasury yield minus the 10Y German Bund yield is at a multi-decade high. This is a major supportive factor for the U.S. dollar. Richard Benson, who helps manage $20 billion at Millennium Global said:

The very slow and gradually widening interest-rate differentials against the euro have now reached a tipping point where that is very powerfully positive for the U.S. dollar

Many are calling for a blowing out of the U.S. deficit leading to an inflation-driven deprecation of the U.S. but I believe this is premature. An

This article was written by

Michael Roat profile picture
I have approximately 8 years of experience trading and 10 years of researching, specifically relating to central banking and credit cycles. I have developed a keen ability to synthesize and understand complex macroeconomic information very effectively and quickly. I have an in-depth understanding of international capital flows, foreign exchange rates, and global bond, equity and commodity markets. I have extensive experience tracking economic data and developing macro-economic investment theses. I specialize in and often express views relating to currencies, monetary policy, real (inflation-expectation-adjusted) interest rates and bond yield differentials. I avidly read and process daily economic news, analysis and market data. I can contribute to relevant economic thinking and discussion as well as generating and assessing investment ideas using the knowledge I’ve developed through first-hand experience trading in competitive financial markets.Disclaimer: I am not a registered financial advisor. I am a newsletter provider and nothing published under the name Michael Roat or Tri-Macro Research should be considered financial or investment advice.

Disclosure: I am/we are short GG, ABX, FCX, RGLD, WPM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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