Markets, like people, have distinct personalities.

Utility stocks, for example, are usually slow and steady. They’re boring but generally quite reliable.

Cryptocurrency is the complete opposite. That corner of the market is exploding with energy and volatility.

And then we have regular currencies…

The U.S. Dollar

Like the U.S. dollar.

The dollar is fascinating. Some analysts consider the dollar a safe haven. Others say the dollar seems to do well when the U.S. economy is doing well.

The truth is, both camps are correct…

In many ways, the dollar is the ultimate safe haven. As the global reserve currency, it’s backed by the full might of America. That’s why during times of uncertainty, you can see the dollar strengthen quickly.

When looking for a safe haven, the U.S. has many attractive options. Whether it’s Treasuries, stocks, or just plain old cash, the U.S. has something for everyone.

On the other hand, let’s say the U.S. economy is outperforming the rest of the world by a wide margin. In such a scenario, the dollar can also strengthen.

During such a time, investors are afraid of putting their money to work in emerging markets. While emerging markets can deliver better returns, they’re also riskier. And if the global economy is lagging the U.S., then investing in the U.S. is the best move.

What about when the dollar is declining in value? That scenario happens for a couple different reasons as well.

The first is when other countries are successfully outcompeting the U.S. for investment flows. If growth prospects are considered more attractive outside the U.S., there will be less demand for the dollar.

The second scenario is when investors see weakness in the U.S. economy. This means they expect the Fed to cut interest rates to help the economy out.

More Weakness Coming

Right now, we’re trending more closely to the second scenario, which results in dollar weakness.

The reasoning is simple. Higher rates should cool off the economy. And it’s unlikely the Fed will get the balancing act of raising rates high enough to tamp down inflation – while not sinking the economy into a recession – exactly right.

If the Fed overshoots raising rates, the economy will eventually start cooling down. At this point, the Fed will go back to its old playbook of cutting rates and printing money to help stimulate the economy.

Although more and more central banks are expected to hold rates – or even cut them – next year, the Fed is likely to be among the first to act.

This was true in the opposite direction, too. The Fed was the first major central bank to raise rates in 2022.

It was the Fed that kicked of the dollar’s period of strength in 2022. And it will be the Fed that kicks off this next period of dollar weakness.

In fact, the decline in the dollar has already started. At the beginning of October, DXY was up nearly 4% year-to-date. As of writing, DXY is now up just 0.37%.

Based on my analysis, I expect at least another 10% decline or so before the dollar stabilizes.

Happy trading,

Imre Gams