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It will be tough for the USD index to move up without the CBs and monetary authorities buying it, and that means crossing Paulson and accepting being labeled a ‘currency manipulator’ and ‘outlaw.’
And the higher crude prices mean USD spent on imports increase and unless spending on US domestic assets, goods, and services goes up by that much those unspent USD need to be/are ‘saved’ by non-residents and the USD goes to a level that reflects their current desire to accumulate them.
A rising USD is evidence that the foreign sector wants the extra USDs and are fighting over them. A falling dollar is evidence of the reverse.
Also, if they don’t like the other currencies any more than they like the USD, the currencies can remain relatively stable as the excess USDs are all spent on US exports and US domestic assets. The evidence of this is rising/accelerating US exports and export prices and support for US assets which can include real estate and equities. Note the falling USD has made US equities that much cheaper for non-USD based investors.
This is all part of the same adjustment process, which includes ‘inflation’ as all the pieces described above support higher prices for goods and services both in the US and elsewhere.
And the ‘inflation channel’ also is part of the adjustment of the trade gap. I use the extreme example (hopefully it’s only an extreme example) of prices adjusting upward until coffee is $60 billion a cup, in which case the trade gap of $60 billion per month is only one cup of coffee. In other words, higher prices work to bring down the ‘real’ trade gap.
So they are all working together -trade, fx, prices- within current institutional arrangements (including CBs not wanting to be labeled outlaws and currency manipulators vs the desire to support their exporters, etc) as they always and continuously do to adjust desired to actual ‘savings’ of financial assets, and sustain all the indifference levels.
A turning point if the level of the USD is sufficiently low to drive the US exports and asset sales to non residents needed to keep their residual accumulation of USD to their desired levels.
And with crude prices still rising, it seems likely to me that more USD are being credited to ‘their’ accounts than they currently wish to cling to at current exchange rates, so more downward pressure on the USD would not surprise me. Along with the associated increase in US exports and higher prices in general.