If the current course of circumstances in the currency markets continue, we can see a blow off top of the USDX at the 115 to 120 area. The resulting distortions in the global markets could be catastrophic to the QE experiment in the EU and Japan, with brutal ripple effects felt throughout the rest of the Western world and China as well.
Based on the dynamics and relative underpinnings of the national economies and resources, I have to conclude the USD will be the last man standing in the QE experiment. The whole irony with creating a BRICs currency is that the dollar could be so expensive, which would mean the economies of the BRIC nations will enjoy such an enormous competitive advantage versus the dollar, that they will just find it more expedient to continue using the USD. If the BRIC nations attempt to create a transnational currency now, it could create undo demand on their own currencies in making them transaction cross-border-based currency(ies). Thus they could risk losing that competitive advantage.
Moreover, the primary stumbling block for the BRICs in their ostensible endeavor is that no one nation is willing to run trade deficits. If all are ultimately competing against each other in their export markets, where will the needed currency for trade come from? This has been the BRICs conundrum for the past 20 years, when the idea was first entertained.
Furthermore, if the dollar continues rising, it risks setting back the recent increases in American manufacturing capacity. I am concerned with an ultra strong dollar will force many domestic manufacturers to continue taking the risk to source outside American borders, especially with mainland China.
If the Euro continues falling here, the Euro nations are going to find it very tough to find enough nat gas this winter. It’s a self-feeding cycle that is continuing to support the US dollar at the expense of the Euro and yen. The Canadian dollar should hold up fine as it is a energy commodity currency and produces energy in enough abundance.
I think of the wild cards here and contemplate what the nation of Columbia will look like with its sharp shift to the left. Petro promises to shut down the entire energy sector, and I have to consider all of this not coincidental. The timing is too strange to ignore. All these circumstances support the greenback. The Russian war even supports the dollar as much of the world is drawn to the dollar as a substitute for American sourced commodities and relative yield advantages versus the rest of the developed world.
Conclusion: The global circumstances have changed so quickly and decidedly in the favor of the USD, the markets have not yet caught up to these sudden and drastic changes. I suspect that the USDX has more to go before the Fed gets involved to mitigate the dollar’s strength.