King Dollar Abdicates the Throne

Back in March, I wrote of the “Black Swan in Plain Sight” that was King Dollar:

“Based on Taleb’s criteria, it would seem that the Dollar’s advance over the past nine months would qualify as a Black Swan event. If King Dollar is indeed a Black Swan, though, why haven’t we seen reverberations in the U.S. equity market? Probably because it has not yet been elevated to that status among the consensus. Similar to how stocks ignored the initial decline in housing in 2006-07, the stock market is dismissing the abnormal strength in the Dollar.

The bullish narrative that has supported shares has been that a strong dollar is a positive because it means U.S. growth is booming. A quick examination of the facts, though, dispels this notion as U.S. real GDP growth in this expansion continues at its slowest pace in history.

The truth is that the Dollar is strong this time around not because the U.S. economy is booming but because Europe and Japan (the largest components of the Dollar Index) are intent on crashing their currencies. For now, many still seem to believe this debasement and global currency war is a rising tide that lifts all boats, but should weakness in U.S. macro data and earnings continue, this belief may be tested.

With extreme volatility in currencies, commodities, and bonds, it would seem to be only a matter of time before we witness a spillover to equities. And with the Dollar’s black swan advance occurring before the Fed has even removed the word “patient,” we can only imagine what volatility will ensue when they actually raise rates.”

Fast forward to today and much has changed. U.S. equities suffered their largest correction since 2011, earnings and economic growth have weakened, and the bullish narrative behind prior Dollar strength has faded.

After hitting the highest level since 2003 back in March, the Dollar Index has gone nowhere fast and is actually down over the past nine months.


Why has the Dollar been unable to push higher? In my view, it comes back to why the Dollar advanced in the first place: the perception that a) U.S. economic growth was stronger than the rest of the world and b) that U.S. central bank policy would be tighter.

On both fronts we, we have begun to see a reversal of perceptions.

First, as I wrote back in January, the “U.S. decoupling” narrative was based on strength in the S&P 500, not the real economy.

  • At 2.2%, this continues to be the slowest growth expansion in history.


  • U.S. manufacturing data, which tends to be a leading indicator for the broader economy, has shown weakness throughout the year.


  • U.S. economic data relative to expectations in 2015 has been the weakest of the expansion thus far.


A second reason behind the stalling Dollar rally has been an easier than expected U.S. Federal Reserve.

  • Throughout the year we have seen rate hike expectations continue to shift further out in time with a lower for longer glide path.


  • Entering the year markets were expecting the first hike to take place in June or July. Today, expectations for the first Fed hike have moved all the way out to April 2016.


King Dollar Abdicates The Throne

King Dollar has abdicated the throne for now. To the extent that extreme Dollar strength was hampering U.S. earnings and economic growth, this could prove to be a positive for the U.S. as time goes on. But if we accept this to be true, it brings us back to the troubling notion of a global currency war that I have written much about over the past year.

Simply stated: in a world of slowing growth, currency debasement has become the economic weapon of choice. While the U.S. Federal Reserve was expected to raise interest rates in 2015, the tidal wave of global central bank easing proved to be too much.

In just the past year alone, we have seen monetary easing measures in Switzerland, Sweden, Denmark, the Eurozone, Japan, Canada, Norway, Poland, South Korea, Australia, China, India, Turkey, Indonesia and Russia.


To have expected the Fed to raise rates against this backdrop was a tall order for an institution that started the currency war with their aggressive rate cuts and quantitative easing (QE) back in 2008. That said, it will be seven years of 0% interest rates come this December and as I have argued the costs of continued easing today likely outweigh the benefits.

It is time to put an end to the currency war games and Fed must take the first step by moving off of 0%. If that means crowning the Dollar King once more and suffering short-term volatility in markets, so be it. Only those with a myopic view would prefer short-term market gains to long-term economic growth. Call me crazy but I’m of the belief that a strong currency over the long-run is actually a good thing. Long live King Dollar!

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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.


Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of two award-winning research papers in 2014 on Intermarket Analysis and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors, an institutional investment research firm. Previously, Mr. Bilello held positions as an Equity and Hedge Fund Analyst at billion dollar alternative investment firms, giving him unique insights into portfolio construction and asset allocation.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

You can follow Charlie on twitter here.

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