What could send the dollar higher again?

WHAT COULD SEND THE DOLLAR HIGHER AGAIN

The big forex price story of the year is still the dollar's decline against pretty much every other currency - 8.5% against a basket of peers year to date DXY - but really that's a first half story, price action has been muted for a few months.

If anything the dollar has been nudging higher, and, as a result, HSBC reckon there's a growing sense of fatigue towards a dollar bearish stance.

Just to test this in their big monthly currency note for October they set out what would send the dollar back up again.

Skipping to the end, they don't even buy their own argument, but still think it's a useful exercise.

And with the reasons for dollar weakness already well versed - Fed cuts, political chaos, overseas investors reallocating a bit and also hedging the currency risk from their dollar assets - it's much more interesting to look at the bull case.

Basically, it's all about U.S. growth.

The world's largest economy is currently doing fine, but if it "showed strong evidence of reaccelerating, which in turn meant the market had to reverse its pronounced Fed rate cut expectations ... this would benefit the dollar greatly," say HSBC.

Renewed U.S. exceptionalism would also help foreign demand for U.S. securities to stay healthy, and, if the Fed does become more hawkish, that would make hedging dollar assets more expensive, and could slow any more hedging, and even cause an unwind.

So what's wrong with that case? Not a lot really, but HSBC still find the bear case more compelling and don't seem particularly convinced by the idea that we are coming back to an era of U.S. exceptionalism.

(Alun John)

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