This post is taken from our January 30th weekly report.

The dollar broke through the critical 90 level on the DXY, after comments from US Treasury
Secretary Steven Mnuchin supporting a weaker dollar. (The timing of the comments at such an
important level we don’t think was entirely coincidental.) It may seem paradoxical that the dollar
is selling off on a positive outlook for the US economy, but this makes more sense when we
remember that FX rates have two sides. As people upgrade their outlooks for the US economy,
this is also taken as positive for the rest of the world – with a beta of more than one – resulting in
foreign currencies performing better than the dollar. The net result is necessarily a weaker dollar,
at least in the first instance. We can see this geared effect in the top chart. When the Rest-of-World                                vs US Money Multiplier is rising (ie the beta is more than one), the dollar falls, and
vice-versa when the Multiplier is falling.

Nonetheless Mnuchin’s comments came at the same time as comments on trade that may lead
to retaliation. The picture for global trade is solid for the moment (bottom-left chart), although
this could change quickly, which would be bad for global growth (the beta would fall to less than
one), and foreign currencies would likely depreciate against the USD (so the dollar rises). Finally,
the bottom-right chart reminds us that the temptation to begin lending dollars against other
currencies will soon become too great to resist.

(Click on image to enlarge.)

Source: Bloomberg, Macrobond and Variant Perception