Did you ever hear the parable about the frog and the pot of boiling water? If you throw a frog into boiling water, it immediately jumps out (or so the saying goes). But if you place a frog in regular water and slowly bring up the temperature, the poor thing will swim around calmly until it dies. Morale of the story: Conditions don't always decline quickly and dramatically, but often only slowly and gradually.
That's what I expect with the U.S. dollar. I think the greenback will see a significant decline over time, but I don't expect the drop to happen overnight. Rather, the pullback will have ebbs and flows.
For example, I predict that the euro will rally against the dollar for a while and then pause -- but I'm convinced that a move above 1.2500 on EUR/USD from the current 1.19 or so will eventually happen.
Many things will bolster the dollar's increasing weakness, including:
Nobody fully reported this at the time, but the state-run China Securities Journal wrote in a recent editorial that "it's good timing for China to boost yuan exchange-rate flexibility in the short term."
The last time I heard such talk out of China, Beijing decreased dollar purchases, which prompted the euro to rise against the greenback. The dollar eventually fell to 1.6000 against the euro from below 1.0000 previously.
Energy importers are decreasing their demand for dollars because the greenback is no longer the only currency used for the oil and gas purchases. The number of exporters who now accept euros or yuan is steadily rising.
Federal Reserve chair Janet Yellen was largely dovish in her recent speech at Jackson Hole, while European Central Bank President Mario Draghi betrayed no anxiety over the euro's rising value against the dollar.
Meanwhile, the Trump administration has publicly decried a strong dollar and how the greenback's consistent rise in value over the years has allegedly depleted U.S. manufacturing.
The Bottom Line
It's unlikely that any central-bank jawboning will change the dollar's direction. Instead, I see jawboning as merely a method of controlling the decline's pace.
Or, to put it in Floyd Mayweather/Conor McGregor terms, don't look for the dollar to be knocked out this fall, just knocked down and then get back up again. I doubt there will ever be a knockout, just a steady decline to a more suitable EUR/USD level.
I see 1.2500 EUR/USD doable by the Sept. 30, with 1.3000 achievable by 2017's end. This is a core belief that I've been espousing since 2017 began (a time when most investment houses were calling for the dollar to rally to 1.0000 to the euro).
Sure, the EUR/USD has already moved to 1.1920 from 1.0450 over the past eight months, but moves of this magnitude are par for the course for this trade. Chart watchers only need to expand the time series they look at to see the awesome moves that the euro can attain from here.
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