What Could Turn the Dollar?
The obvious catalyst for a dollar rebound is a round of risk aversion but given the buy-the-dips mentality and optimism about a virus vaccine, it's tough to see that as a lasting paradigm shift.
The main problem for the dollar is that it's embroiled in politics. The US stimulus standstill is dragging on with no breakthrough in sight and time is ticking towards the November 3 election. Notably, Republicans have seen a recent uptick in support and that may setup a Biden win with a Republican-controlled Senate. In this climate, that's a recipe for economic stagnation.
There is also the ongoing problem of relative valuations. US markets deserve a higher multiple after a generation of outperformance but there is a limit.
Aside from risk aversion or a broad spike in the virus, it's extremely tough to make a case for the dollar before the election. With that, the moves are continuing to stretch.
Back to the Fed, Ashraf tells me to watch out for the annual Fed symposium at Jackson Hole to be held late next week online for any clues on the details of moving towards formalizing a higher inflation target. The implications for such a move would be enormous for USD and metals.On Wednesday, we get the latest FOMC minutes and there are questions about what they will do next. At the moment, there is no scope for a hawkish shift, even with US housing creeping towards a boom. The minutes are likely to touch on forward guidance or yield curve control but we struggle to envision anything that could lead to lasting dollar support.
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