Exchange rates attract flies

Aside from monetary policy, there may be no issue in finance that attracts more flies than exchange rates.  I would guess this reflects that exchange rates are so hard to explain, even in retrospect. This tends to make any wrong idea as good as the next, maybe. Or maybe I am biased by personal experience. I started my career producing wrong views on exchange rates.

In the past several years, the global effort to reflate economies has, taken in isolation, been a blessing, at least until rates went negative and the issue became a bit more controversial. And yet this generally helpful positive sum game got distilled down to “currency war.” So scary.

Here’s Bloomberg talking about the rally in the trade weighted dollar. Their sophisticated take is that a rallying dollar up to a point actually reinforces the case for Fed tightening in December.

In other words, if the dollar were to decline, all else equal, the Fed would be more inclined to hold off in Dec. Sure pal.

Of course, if the dollar rallies a lot, then the influences switches sign, for some reason. Very very sophisticated, something you do indeed often see in currencies.

I would guess this is a case of offsetting errors cancelling out, allowing the journalist’s conclusion to be in the right ball park despite his best efforts.

The actual rally in the trade trade-weighted dollar slowed dramatically several months ago, although the index’s very most recent tick has been up.

As a result, the disinflationary pulse from the previously-strong dollar is beginning to unwind, which improves the case for a further renormalization of core inflation back to target, which in turn strengthens the case for a move in December.*

The dollar rally supports the case for Fed rate hike.  The absence of a dollar rally now supports the case for a Fed rate hike. Opposite views. But whatever. Close enough.

Were the dollar actually to resume rallying, then this could change and the case for further Fed tightening would weaken, all else equal, which I guess it never is.  There is no need for making up sign switching here.

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* Thanks, Mayank, for pointing out some street research making this point.