The dollar is the top performing G10 currency today and in 2013. Here’s why.
Since the start of the year, the US dollar has gained in risk-off and risk-on situations. The binary description of the day’s events that served so well during the crisis still has some implications for commodity currencies but it’s gradually become antiquated as a way to describe the US dollar.
What’s happening is that the dollar is making the transition from a funding currency to a growth currency. By itself, this transition is bullish because it means long-term carry trades are being unwound.
Beyond that, it’s even more bullish.
The improved short and long-term dynamics of US growth will attract new investment. I expect this to happen relatively quickly because much of the investment in America will be a return of US money that has moved offshore for the past decade — it’s much easier to bring money home than to invest in an emerging market for the first time.
The main risks are political (and I might be being optimistic here) but even with politics there are signs that militant attitudes about debt are softening. As those risks diminish, confidence will return and I expect investment to pour into the US.
To get a sign of how much the US dollar could rise, we only need to look at how far it has fallen.
US dollar index monthly
