Note how the portfolio shifting that caused the dollar to appreciate has also caused the US trade deficit, excluding petroleum, to likewise increase. That is, it’s not wrong to say that the global portfolios shifting to dollars are getting more and more of those dollars from US resident’s growing net purchases of imports.

And likewise the EU is experiencing a rising trade surplus as the weak euro/strong dollar has increased EU ‘competitiveness’ by lowering their costs of labor and other domestic inputs vs their trading partners. From the EU point of view they are net selling to US residents and the selling those dollars/buying euro in the market place to get the euro they need to meet their domestic costs of production. This ‘removes’ the euro that are being sold to buy dollars.

This process continues as portfolios afraid of QE and negative rates continue to shift from euro to dollars, driving the exchange rate to the point where the trade flows accommodate their demands as markets continually adjust to express indifference levels.

Note however, that today, for example, the currencies are priced by portfolios where the US has a reasonably large and growing trade deficit and the EU has a reasonably large and growing trade surplus accommodating the ongoing portfolio shifting from euro to dollars. But what happens when the portfolio shifting subsides (which it sooner or later does as portfolios can only shift what they have in stock)? With the exchange rate at a level that is adding dollars and removing euro in line with the prior desired portfolio shifting, a drop in portfolio dollar buying/euro selling means the trade flows are generating an excess supply of dollars and creating a shortage of euro, in which case the exchange rate at the same time adjusts as per the new supply/demand dynamic. In other words, when that happens the dollar falls vs the euro and continues to fall until the trade flows sufficiently reverse to ‘restore’ balance.

From a trading point of view, however, I don’t know when the reversal will take place or from what level, but if any of you might know please let me know thanks!