Chandler: Dollar Decline Narrative is Exaggerated

Your Real Vision Daily Briefing for July 30, 2020

Marc Chandler discusses currency markets, the dollar’s reserve status, and the world’s loosening grip on the goal of economic efficiency.

  • A seemingly weaker U.S. recovery is expressing itself through currency markets.
  • The narrative of the dollar losing reserve status and the loss of U.S. hegemony is exaggerated; dollar weakness is likely due to cyclical trends.
  • Nations are reducing their dependency on economic efficiency and the pandemic is catalyzing the trend.

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At the start of the global health crisis, the private sector flocked into dollars as a safe haven, but as central banks and governments took action, markets found a healthier appetite for risk and that demand has declined, Marc Chandler, chief market strategist at Bannockburn Global Forex, told Real Vision during today’s Daily Briefing.

Chandler said that dollar strength stood on two legs before the crisis: interest rate differentials and the growth differential. As the U.S. economy has worsened as a result of the pandemic, it has removed the first leg. Some sectors of the economy, like autos, manufacturing, and housing are regaining strength, but overall, other countries have done a better job at containing the virus, which has knocked out the growth differential leg.

As a result, we are seeing dollar weakness, but Chandler thinks that the dollar decline is part of a cyclical turn of the dollar and he believes the narrative that the dollar may lose reserve status and threaten U.S. hegemony is exaggerated.

He argued that the dollar’s third big cycle was coming to an end before the crisis, and that COVID gave it a last gasp through first quarter. Now, he believes cyclical forces are prompting asset managers, speculators, and hedge funds to be turn their ships in a dollar negative direction.

While he doesn’t expect to see a decline to 2008 levels, Chandler said he thinks the dollar will fall further and that this will be a multi-year selloff.

Chandler also shared his view of the longer term global economic picture and discussed his thesis that we are entering the end of economic primacy. For a long time, economic efficiency has been the end all be all motivating force but now the world has other considerations.

He cited economic nationalism, environmental issues, and social justice as potential checks on the economic efficiency argument.

“There’s a new paradigm since the Great Financial Crisis and COVID is accelerating the forces. These long-term trends give meaning and context to everyday events,” he said.