Elegantly Soaring Dollar to Hit “Air Pocket” in 2015, Slated for Long-Term Decline

Monday, December 29, 2014
By Paul Martin

by Wolf Richter
December 28, 2014

The death of the dollar – as much as some folks were ready for it – didn’t occur in 2014. OK, there are a few days left, but you get the idea. Instead, the dollar has been hot.

It rose against a large number of currencies. Some of them, such as the Russian ruble, have plunged for reasons of their own and have engendered desperate efforts to stem the decline. Other countries, like Japan, have gone all out to demolish their currencies. Escalating the currency war is frowned upon. So Japan found more acceptable names for it and redoubled its efforts. And the ECB has been passionately talking down the euro, but has done relatively little by central-bank standards to actually water it down.

Central banks tried to dominate the currency markets, but currency markets are an unruly crowd that can’t be easily cowed. In sovereign bond markets, central banks rule with an iron fist by imposing zero or even negative rates and buying up sovereign bonds, or promising to do so, with money of which they can create an unlimited amount. These “bold actions” inflated valuations and pushed down yields to grotesque levels, such as the crappy 10-year Japanese Government Bond yielding 0.32%.

That kind of control eludes central banks in the currency markets. They’re doing a superb job devaluing a currency, but bringing it back up after it begins to spiral out of control is hard. It requires resources that a central bank can’t print. It requires interest rates so high that they might strangle the economy. It requires other expensive, painful, or even impossible measures. And so more often than not, that noble fiat currency just goes to heck. We’ve seen plenty of it in 2014.

In this environment, how fast and how far will the dollar continue to rise in 2015?

“Whenever a consensus is so unanimous, our gut tells us it is wrong,” BlackRock, the largest asset manager in the world, explained in its 2015 Investment Outlook. “Stretched positioning means even a mild disappointment to dollar bulls could prompt a sell-off in the currency.”

The Rest…HERE

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