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A Further Drive to Stimulus and Protectionism Lifting the Dollar

A Further Drive to Stimulus and Protectionism Lifting the Dollar

John Kicklighter, Chief Strategist

Talking Points:

  • Global monetary policy is converging on extreme accommodation having an increasingly disruptive global impact
  • Competitive monetary policy generates greater FX volatility while shortfalls in efforts fuel risk aversion
  • There are few outlets for those seeking to avoid value-eroding stimulus and market risk aversion - the Dollar is one

Harness the power of big data to evaluate millions of historical price points to calculate the probabilities of short-term market moves using the GSI Indicator.

Monetary policy is growing increasingly extreme at the same time its effectiveness diminishes. This is adding to instability in the financial system and offering few outlets for investors to find haven from the subsequent depreciation and volatility. The US Dollar is one of the few alternatives that can still provide a substantial alternative. In fact, recent developments have significantly bolstered its long-term appeal.

The haven appeal that the Dollar maintains has held the greatest potential and has only recently hinted at its scope. With the post-Brexit volatility stretching the world, the need for liquidity amid bouts of panic reminded investors what the Greenback represented to the broader financial system. Furthermore, the long-term systemic threats to the Euro's and Pound's reserve status leveraged the primary currency's increasingly unique appeal.

Looking further out, the universal concern over investor sentiment and financial stability will dominant. However, in the short-term the relative monetary policy that drove much of the FX market's movements over the past four to five years may provide another round of favorable winds. This past session, the Bank of England announced that it will likely ease policy in the Summer while the European Central Bank said it may have to further push a dovish effort by loosening its QE rules. While Fed rate hikes are less likely and less important, the perspective carries heavy fundamental weight nonetheless. We discuss the Dollar's unique standings on the fundamental spectrum going forward in today's Strategy Video. Recognizing the risk they face, central banks are no doubt considering their options. So far, stated solutions to a panicked market have ranged from the Fed's suggestion that it could revert to its easing bearing up to the BoJ threatening direct intervention to shore up liquidity and stabilize its exchange rate. Pursuing individual solutions would be a more targeted approach; but against a global wave of fear, it would very likely overwhelm such efforts. And, any one region that fails to shore up its end can dangerously amplify the systemic risk aversion sentiment. A coordinated effort therefore is a likely solution being floated amongst officials as an extreme response. We discuss the Brexit's global implications and the probably responses from officials in this weekend Strategy Video.

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