09/21/23 09:21 AM EDT

The Dollar Isn't Going Anywhere

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Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

If you tuned into Monday's Tier1 webcast, we leveraged the US dollar correlation for insights on the FOMC. We anticipated the Euro and Pound would rise leading up to the announcement, then decline, pulling equities down with them.

Lately, there's been a surge in BRICS headlines, onshoring news, and crypto enthusiasts predicting the USD's decline. However, today's bonus chart suggests such pessimism might be premature. Also, there's limited evidence backing the onshoring narrative.

The traditional DXY is primarily Euro-centric against the dollar, complemented by the Pound, Yen, CAD, and Swissy. In contrast, the real broad dollar index is comprehensive, including countries like Sweden, Mexico, China, Hong Kong, Brazil, Venezuela, South Africa, and India, in other words, the BRICS, among others.

As we navigate this recession, we anticipate a stronger USD. The Fed states that the dollar represents 96% of trade invoicing in the Americas, 74% in Asia-Pacific, and 79% globally. Furthermore, banks use the dollar for about 60% of all international transactions. Candidly, estimates do vary, but the dollar's dominance remains clear—no currency matches its liquidity.

Research by American University’s Valentina Bruno and the BIS's Hyun Song Shin indicates that a rising U.S. currency makes trading costlier for other countries, overshadowing the benefits of a weaker domestic currency. With the U.S. less reliant on global growth, dollar-denominated assets appeal more to foreign investors, reinforcing the dollar's supremacy and driving its value. This reinforcing cycle, termed the "imperial circle" by the Fed, emphasizes the dollar's lasting significance.

The big takeaway here is the dollar isn’t going anywhere yet; it’s traditionally been an excellent allocation through recessions; we expect it to perform well this go around as well.