The dollar index (DXY) is trading in the “lower middle” of the 107.35/105.54 october range but still at a quite elevated level. There was a short-lived breakout attempt to the downside at the beginning of the last week but it was finally rejected for the time being. Regular readers know that I expect a major sell off in the dollar. But as always in trading, it often takes patience for such moves. At least we have good landmarks with the quite clear October trading range. I have deeper pockets for dollar shorts, but a breakout to the upside is still possible, of course.*
While increasing yields are obviously supporting the dollar at the moment, investors also have to deal with rapidly rising U.S. debt.
For now, investors still feel sufficiently compensated for the risk of a looming soft currency. But there is a tipping point, impossible to determine ex ante, at which investors will ask themselves whether the interest rate level continues to justify an investment in dollars or not.
In this respect, yields must continue to rise as the U.S. deficit continues to be inflated to keep attracting dollar buyers. There is only one problem: Many US banks are already under considerable pressure due to the negative market values of their bond portfolios. It is therefore likely to be only a matter of time before the FED attempts to stabilize the interest rate level and thus bond prices by adjusting its interest rate outlook. This could then save many bond portfolios, but the dollar would become less attractive to foreign investors. On the one hand, interest rates are falling. On the other hand, it is to be feared that U.S. debt will nevertheless continue to rise. The risk of a dollar investment may then no longer be adequately remunerated.
I certainly don't want to proclaim the end of the dollar today. After all, dollar cash has been one of the best investments in recent years. But there are increasing signs that the “long dollar” trade could be over for the time being. Timing is everything, no question. But the upcoming dollar sell off could be just as violent as a possible short squeeze in bonds.
Good luck,
Sebbo
(*reminder: my content is intended to be used and must be used for informational purposes only. It is very important to do your own analysis before making any investment based on your own personal circumstances.)