The U.S. dollar index is on the brink of breaking the psicological level of 100. High levels of debt and the beggining of a dovish interest rate cycle are pushing the dollar down vs the basket of other major fiat currencies that compose the dollar index. As you can see in the chart below, the correlation with the 2 year bond, which is a great predictor of what Fed funds rate will do, is high, and seems to indicate the breakout is imminent. What the chart doesn’t tell us, is that the other economies the dollar compares to, are also lowering rates, and have also high levels of debt. The real weakening of the dollar can be seen against gold, where the dollar has lost 30% of its value YTD and 60% over the last 2 years. This can bring a second wave of inflation if the Fed continues to stimulate the economy and the government keeps spending more money that it earns. A weaker dollar has historically benefited Emerging Markets assets and non US equities. Another rotation brewing?
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