1) Take a look around
The main reason the US dollar is so strong is the obvious one: The US economy looks better than anywhere else. It’s the only place you can point to and say “there could be surprisingly-strong growth in 2025”. Europe is a mess, Japan doesn’t need to hike, Australia is tied to China, Canada’s housing is an anchor and Mexico is in the tariff crosshairs. Obviously there are exceptions and caveats, but if you’re looking for growth next year, start in the USA.
2) Today’s CPI highlighted some risks
Core CPI m/m averaged quarterly
I think this chart highlights the problem well and there is no better chart to make the case for the US dollar. It shows the average quarterly m/m rate of inflation. Core CPI is starting to look like it could get stuck around 0.3% m/m, where it averaged in Q2 and so far in Q3. Run that math on that over 12 months and it’s a problem. When you zoom out, you see where rates need to get in order to get back to the 30-year period of low rates from 1990 to 2020. We can get there but if you have strengthening growth from here, that will mean rates stay higher for longer.
3) The Fed is listening
We got comments today from three Fed officials: Kashkari, Logan and Musalem. All three were incrementally more hawkish, or at least more upbeat on growth. There was no change from the message about gaining more confidence about inflation falling to target in the medium term but they’re starting to highlight risks, and why wouldn’t you when economic data has been running hot and markets have been running wild.
4) The bond market is listening
US 10 year yields
There is always a dance between the Fed and the bond market but it’s often the bond market leading it. That’s the case at the moment with bonds pricing in just 75 bps of US cuts through 2025. In addition, rates are creeping up at the long end and threatening to break the post-election highs.
5) The allure of US capital markets
An underrated and under-discussed pull on the US dollar is from capital markets. Social trading is a global phenomenon that’s led to memes and momentum dominating. Like Hollywood, the US is wonderful at gobbling up bandwidth and that means it’s gobbled up dollars into tech stocks, meme stocks and an extraordinarily-liquid derivatives market. It’s a long-term dividend of dollar dominance that continues to accumulate value and flexes its muscles whenever markets get euphoric.
Two risks
The biggest risks I see are that 1) Deficits start to matter again, via market pressure or Congressional pressure. 2) Everything goes sideways with tariffs. Plenty of people are watching the second risk but want to ride this wave as close to innauguration as possible.