The dollar will enter a new bear market cycle. What’s the difference this time?

After a nine-year strong bull market cycle, the dollar has been hit by all sides. This year, the Federal Reserve, along with other central banks, cut interest rates to the lowest level, eliminating the dollar’s advantage over the euro and the yen. Expanding debt and deficits erode foreign investment returns in the United States. Trade weighted measures suggest that the dollar is long overdue. This is reminiscent of the turning points of 1985 and 2002, when a sudden policy shift overturned the dollar and brought about long-term weakness. Now, the more gloomy outlook for economic growth in the US than in Europe is likely to accelerate this reversal. No wonder, after the worst month in 10 years, the dollar has fallen to a two-year low. Hedge funds are short on the dollar for the first time and are short on the dollar, which is unlikely to rebound in the short term. < / P > < p > “the US dollar has been overvalued for a long time, which may eventually become a catalyst for a downward trend for many years,” said Jack McIntyre of Brandywine global investment management. “As we have seen before, when valuations are too high, a policy or economic shock can quickly change the trajectory of a currency. The Fed, as well as the way we deal with debt, seems to be surging To be sure, stubborn bears have been warning the dollar about a devaluation for years, but they have been wrong again and again. Whether it is inflation, the double deficit of the United States or the loose monetary policy of the Federal Reserve, worries about the devaluation of the US dollar have not reduced the status of the US dollar in the real world. Currently, the U.S. dollar still accounts for more than 60% of the global reserve currency, making it the most widely used currency in international transactions. Moreover, Liz young of bny Mellon investment management believes that the end of the bull market does not necessarily mean the end of the dollar. “There is a difference between a devalued dollar and a complete collapse,” she said “It’s just a callback. The idea that the dollar will lose its reserve currency status in the short term is a bit extreme. ” However, a group of forecasters, including Goldman Sachs, say this time is different, and the dollar’s final day is coming. According to the bank for International Settlements (BIS), the US dollar has risen 30% from its lowest point since 2014, based on the real effective exchange rate (taking into account the relative trade balance of countries), making it the most overvalued major currency. It also rose about 16% against the euro, according to OECD data. The first bull market cycle of the dollar occurred between 1980 and 1985, when the value of the dollar almost doubled. But once it signed the plaza accord with Japan, the world’s richest country, to devalue the dollar and help the United States out of recession, the dollar soon lost all of this. The second cycle started around 1995 and lasted for seven years. At that time, the market speculated that President Bush wanted the US dollar to depreciate to stimulate exports and manufacturing. Over the next two years, the dollar fell 33%. Guillermo felices, head of research and strategy at BNP Paribas, said: “the dollar cycle is long and sustained and we are now at the top of the valuation.” He expects the dollar to fall in the next few years. Finally, relative monetary policy is the main driving force. In terms of policy stimulus, the Fed is still the most proactive central bank, and this is likely to continue. ” < / P > < p > the Federal Reserve has pledged to keep interest rates close to zero in the next few years as central bank officials try to mitigate the economic impact of the pandemic. However, although European and Asian countries have achieved greater success in curbing the spread of the epidemic, its efforts have been hampered by the failure of the United States to control the epidemic. < / P > < p > this has put pressure on the outlook for us economic growth, with US Treasury yields falling further and raising expectations of stimulus measures to expand the deficit. The more frightening sign for the dollar is that inflation adjusted real yields are now negative, reaching a record low in July. < / P > < p > Wall Street heavyweights, including gonzalac and Dario, are watching. Earlier this year, gonzalac said his strongest market belief was that the dollar would weaken. Dalio believes that tensions lead to a capital war, which will lead to a devaluation of the dollar. < / P > < p > in fact, investors made a net short sale of the dollar in June for the first time in two years. The options market showed that the demand for short bets on US dollar increased, and the one-year risk reversal index of the US dollar spot index was obviously bearish. At the same time, the decline in US bond yields also reduced the cost of currency hedging, hitting the dollar. < / P > < p > until earlier this year, these costs were very high as a result of us short-term interest rates being much higher than other countries’ interest rates, making it impossible for many overseas investors to make a profit to withstand the fluctuation of the US dollar. As a result, some foreign insurance companies and asset management companies choose to buy U.S. assets that are not hedged and, in the process, buy dollars. < / P > < p > however, after the Federal Reserve cut interest rates to near zero, foreign investors can now buy dollar assets at a lower cost and hedge them in their own currency, without any benefit to the dollar. Tim Graf, head of global macro strategy at State Street, said: “the insufficient role of hedging is a potential reason for the long-term decline of the US dollar. We know that foreigners hold a lot of U.S. stocks and bonds, and now they can hedge at very low costs. ”