Wednesday, July 19, 2017

Reasons to Expect the USD to Continue to Fall


Bryce Coward (Jul 18, 2017) - The Euro has spent the better part of the last decade being overvalued vs the USD. In 2015 the Euro finally became undervalued and early in 2017 it became one standard deviation undervalued. If the Euro rallied another 10% from here it would still only be fairly valued vs the USD on a Purchasing Power Parity basis.

The US fiscal position is highly correlated to the level of the US dollar index. If history is a guide, an expanding budget deficit would likely be accompanied by a falling USD. In the chart below we plot the US budget deficit/surplus (blue area, left axis, inverted) against the USD spot index (red line, right axis, inverted). We can see that over long periods of time this relationship holds quite closely.