Wall Street's Finest, the inside hotline, for the hottest stocks picks you idiots could never find!: DOLLAR Bull case intact, it's all about perspective...

By Marc Chandler of Marc to Market

Tuesday, July 19, 2016 5:27 PM EDT

Our underlying constructive outlook for the US dollar remains intact. It is broadly based on the divergence between the US and most other major economies. The US acted early and aggressively to counter the Great Financial Crisis. Unorthodox policies, such as quantitative easing, were adopted years before the ECB and BOJ. This has produced different outcomes. US economic growth may not be impressive by pre-crisis standards, but it does not seem particularly fragile.

The Federal Reserve may be normalizing monetary policy more gradually than we anticipated, but the ECB and BOJ are more aggressive. Although there was a scare around the UK referendum, the derivatives markets clearly show that the next Fed move is a hike, not a cut. Many observers expect the ECB to ease by changing from the capital key to a debt market measure to guide its sovereign bond purchases. This would reduce the quality of assets being bought, which some economists regard as more aggressive policy. Many also expect that the ECB will announce in Q4 that it will extend its purchases, which have a soft end-date of the end of Q1 17, after having been extended once already.

The BOJ is expected to ease policy as early as next week. It may be part of a larger fiscal-monetary initiative to strengthen the economy and arrest falling prices. The Bank of England gave as clear a signal as can be reasonably expected that it will ease monetary policy next month. Australia and New Zealand may cut rates next month as well.

At the same time, the US economy appears to have accelerated in June, and that momentum should carry into Q3. The service sector ISM was the best of the year. Jobs recovered from May's fluke. Manufacturing and industrial output strengthen. Retail sales were stronger than expected, and price pressures were slightly firmer.

The Dollar Index is not a good proxy for a trade-weighted index. Two of the US largest trade partners, Mexico and China, for example, are not included. However, for a rough and ready proxy, the Dollar Index may be useful. After trading broadly sideways in in H2 13 and H1 14, the Dollar Index rally from around 80 in mid-2014 to 100.50 by the end of Q1 15.

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Marc Chandler

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Marc Chandler has been covering the global capital markets in one fashion or another for more than 25 years, working at economic consulting firms and global investment banks.

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