US Dollar & US Exceptionalism

The US Dollar trends in a long-term 10 year cycle and it may be turning.

6 months ago   •   3 min read

By David N. Dyer
Table of contents
If I could summarize any commodity-based business or cycle in one long-term chart, this is it.  

It's the trade weighted US Dollar.  This is the most important chart to watch over the next decade.  The red dotted lines are decade-long periods where the US Dollar depreciates against other currencies, and the green dotted lines are decade-long periods where the US Dollar appreciates against other world currencies.

US Dollar, trade-weighted ($DXY), Monthly

Reserve Currency

The US Dollar is important because it's the reserve currency for the rest of the world.  Therefore, it acts like the central bank for the rest of the world: monetary conditions tighten when the US Dollar is appreciating, and monetary conditions loosen when the US Dollar is depreciating.  Growth for most of the developing world does materially better when the US Dollar is depreciating and does typically worse when the US Dollar is appreciating.  You can think of it as a tailwind or headwind for economic growth; above trend growth when it's going down and below trend growth when its going up.

Impact on Commodities

Another interesting point is that most commodities are traded in US Dollars.  When the US Dollar is getting cheaper relative to a foreign buyer, they're able to buy more commodities, this causes the demand for commodities to increase.  So as the US Dollar depreciates, economic growth is stimulated and demand for commodities gets magnified.  Further, as the US Dollar depreciates it enhances the competitiveness of US exports - of which commodities play an important role - crude oil, coal, natural gas, etc.

If you look again at the chart, you can think back to periods of good times for most extractive commodity-based industries.  These good times generally align with the red dotted lines and US Dollar depreciation, whereas the difficult times generally align with the green dotted lines and periods of US Dollar appreciation.  

I think we've turned the corner and we're in for a decade-long period of US Dollar depreciation which should last throughout the 2020's.  

These periods typically coincide with non-US exceptionalism, where emerging markets take center stage for growth, and commodity-based companies are the most valuable in the world.  At the bottom of the last red dotted line, say 2007/8, the most valuable public company in the world was Exxon Mobile, today it's Amazon & Apple.  If you recall back to that period, China took center stage and it all culminated with the Beijing Olympics.

The Dollar Cycle

The pendulum swings hard in each direction and I think it's about to turn back towards valuing raw materials needed for everyday life as more important than imagined trips to Mars.  This also means US exceptionalism has peaked for this cycle.  The rest of the world valuing US companies and US markets as more important than others are part of the pendulum swinging.  It makes sense: if capital begins to go elsewhere there is less demand for US Dollars which pushes it lower, causing the trend to continue far longer than most believed possible.  These trends continue until something big smacks the status quo in the face... and only then do they reverse.  In 2001/2 it was 911, in 2007/8 it was the Great Financial Crisis, and today it is obviously Covid.

In order to navigate our way through this, we will try to lean into emerging market equities, commodity producing equities and the commodities themselves.

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