Is This a Trump Rally for the U.S. Dollar?

The U.S dollar index recently hit a 14-year high.  This would have been hard to believe 3 or 4 years ago in the midst of QE3 – the Fed’s unprecedented program of massive money creation.

The U.S. dollar has been a strong currency for the last several years.  In 2014, the dollar index began to surge up from around the 80 level into the 90s, as the Fed’s monetary inflation wound down.  It has now broken the 100 barrier, but we’ll have to see if it stays there.

With the recent election of Donald Trump, it seems the U.S. dollar is set for another major run.  It is hard to know how much of this is due to the election of Trump versus other factors.

Trump has been somewhat critical of Janet Yellen and the Fed.  He will get to appoint Fed members, including the chair position, in about a year from now.  While Trump has shown signs of wanting to have more “hawkish” members (more concerned about inflation), it is hard to predict if this will end up a reality.  If the economy gets bad enough, it is hard to imagine that the Fed wouldn’t respond with more of the only major thing it knows how to do – create money out of thin air.

Trump’s win might have been a catalyst for the dollar to surge higher, but I think it was inevitable anyway.  QE3 ended just over two years ago, in October 2014.  Meanwhile, the other major central banks of the world – especially the Bank of Japan and the European Central Bank – are engaging in unprecedented monetary inflation.

As I often say, it is not so much that the dollar is strong, but that it is less weak than the other major currencies.  It is not hard to beat out a currency like the euro when you look at the depressed economies of Western Europe, coupled with the reckless policies of the central bank.

This is causing a little bit of short-term pain for gold investors living in the United States.  Still, it is important to remember that gold can still go up in dollar terms even if the dollar is rising in comparison to other currencies.  If all of the central banks have a race to the bottom, gold will do well against all currencies.

As of this writing, the euro is trading at about $1.06.  It takes $1.06 to buy one euro.  I fully expect the currencies to reach par (one for one) unless something drastic happens.

Meanwhile, we’ll continue to watch the Fed.  I expect the Fed to remain neutral for now, with an occasional token increase in its target rate.  The big question is what the Fed will do when the economy hits its next major bump in the road.  Will we see QE4?

Until we see the announcement of QE4 or something similar, I would expect to see a continuation of the strong dollar, at least relative to the other major currencies.

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