Dollar leads

Otavio (Tavi) Costa – X

Conventional wisdom tends to view a strengthening dollar as a sign that investors are seeking liquidity in moments of stress. 

That narrative has some truth to it, but history shows a far more structural relationship at play. 

Over the long run, dollar cycles have consistently mirrored the relative performance of US assets compared to the rest of the world. 

When the dollar rises, US assets dominate; when it falls, global and emerging market assets tend to outperform.

Keep in mind:

You don’t fix persistent twin deficits and overvaluation with a rising dollar. 

Quite the opposite. 

A weaker dollar increasingly looks like the implicit — and perhaps inevitable — policy choice the US will need to make to stabilize its financial position and avoid a broader economic dislocation, in my view.

Seen through that lens, the potential depreciation of the dollar could act as the catalyst for a much broader reconfiguration of global capital flows.