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Blokland’s daily sketch

Blokland’s daily sketch

23-10-2020 | Daily sketch

Is the US dollar bear market upon us?

  • Jeroen Blokland
    Jeroen
    Blokland
    Portfolio Manager

The US will record massive budget deficits this year and next. Today’s chart shows that, while being far from a perfect relationship, the US Dollar Index tends to drop when the US budget deficit rises. With the trade deficit also up to the highest level since 2006 and flushing the world with dollars, this could create the right conditions for a new long-term bear market in the US dollar. The question is, however, if this will start any time soon. This would require a shift in demand for US dollars, due to, for example, a more sustainable global economic recovery and ongoing loose financial conditions. Issues surrounding US debt sustainability could in theory also be a reason. But I think this is unlikely, especially now that the yields on US Treasuries are becoming more attractive relative to other safe havens. Hence, the conditions for a weaker US dollar are in place, but we need a catalyst to start the process of adjustment.

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As a senior portfolio manager I use charts to illustrate financial issues every day. I tweet my favorites as @jsblokland and was named 'one of the 50 most important people for investors to follow in 2018' by MarketWatch.
Previous editions of the daily sketch can be found on my personal financial markets blog. All graphics provided are collected from Bloomberg data and public websites. They do not always reflect my personal opinion and may also not necessarily reflect the opinion of Robeco. Please cite all references or quote the original source if replicating content.

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