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Great Graphic: The Dollar Index Climbs a Wall of Worry

Summary:
To be sure, the Dollar Index is not the dollar. It is not even a trade-weighted measure of the dollar. Two of America’s largest trading partners, China and Mexico, are not represented. It is heavily weighted to the euro and currencies that move in its orbit, like the Swiss franc Swedish krona, and arguably the British pound. It is primarily a speculative vehicle. Very few investors or businesses have exposure that mirrors the basket. Because it is an index is often appears to trend better than the individual components and therefore may lend itself to trend following strategies. As the Great Graphic here shows, the Dollar Index has been trending higher since late September. Dollar Index - Click to enlarge By

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To be sure, the Dollar Index is not the dollar. It is not even a trade-weighted measure of the dollar. Two of America’s largest trading partners, China and Mexico, are not represented. It is heavily weighted to the euro and currencies that move in its orbit, like the Swiss franc Swedish krona, and arguably the British pound.

It is primarily a speculative vehicle. Very few investors or businesses have exposure that mirrors the basket. Because it is an index is often appears to trend better than the individual components and therefore may lend itself to trend following strategies. As the Great Graphic here shows, the Dollar Index has been trending higher since late September.

Dollar Index

Great Graphic: The Dollar Index Climbs a Wall of Worry

- Click to enlarge

By definition, the trend line is forged from setbacks in the Dollar Index’s advance. The trend line may have frayed on an intraday basis but remains intact nonetheless. A dramatic drop in equities, a selloff in oil, heightened trade tensions, a pause in the escalation, did not break the greenback’s advance. It has also survived both a hawkish read of the Fed in early October and a dovish one in late November.

The trend line comes in near 96.65 on December 4 and 96.80 at the end of the week. Today’s stronger than expected December ISM report, driven it appears primarily by rising new domestic orders (new orders rose to 62.1 from 57.4 and export orders were flat) suggest that US growth may have rebounded after a soft October. Moreover, between the surge in Japan’s industrial output reported last week, the upward revision in German and French manufacturing PMI, and slightly better than expected Chinese Caixin manufacturing PMI, maybe the doom and gloom that had crept into the markets (maybe to explain a downdraft in equities) may have been exaggerated.

The prices paid component of the ISM tumbled to 60.7 from 71.6. Do not expect this to steady the Fed’s hand. As long as growth remains above trend, and the target rate of Fed funds is below the 3.0%, where six of the fifteen Fed officials thought was neutral in September, the gradual hikes should be expected.


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Marc Chandler
Marc Chandler is Global Head of Currency Strategy of Brown Brothers Harriman (BBH). Previously he was the Chief Currency Strategist for HSBC Bank USA and Mellon Bank. He has been covering the global capital markets in one fashion or another for 25 years, working at economic consulting firms and global investment banks. A prolific writer and speaker he appears regularly on CNBC and has spoken for the Foreign Policy Association. In addition to being quoted in the financial press daily, Chandler has been published in the Financial Times, Foreign Affairs, and the Washington Post. BBH provides specialist services and innovative solutions to many Swiss asset managers that include a global custody network of close to 100 markets, accounting, administration, securities lending, foreign exchange, cash management and brokerage services. Feel free to contact the Zurich office of BBH

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