We head into the week with the dollar testing 40-year highs against the yen and trading around 17-year highs against the Korean won (global financial crisis levels). Both central banks are defending their currencies, either with words, intervention, or both. 

 

Meanwhile, the second most widely held currency in the world is trading around the lows of the past year, and looking vulnerable to a breakdown against the dollar.    

 

 

Despite the new Fed Chair's structural view on prices (lower, due to disinflationary forces from AI), the market is now pricing in a rate HIKE by year end, with a coin flips chance of TWO HIKES.

 

So, that market view on rising rates is fuel for the dollar.

 

But that's short-term cyclical. The dollar breakout looks more like a structural capital flow regime, in the early stages.

 

Why? 

 

Dollars are in demand, to access: the U.S. AI boom, stronger U.S. growth, scarce commodities priced in dollars, the petrodollar (reinforced by America's control over energy chokepoints), Treasuries, and now dollar stablecoins. 

 

On the latter, the Federal Reserve is holding its Fifth Conference on the International Roles of the U.S. Dollar, in Washington. Fed Governor Waller gave the opening remarks today.

 

This year's conference is built around digital assets, especially dollar stablecoins, and what they mean for the dollar's role in the world.

 

Remember, dollar stablecoins are backed primarily by U.S. Treasuries.  So, every dollar stablecoin issued is effectively another buyer of U.S. government debt. Scale them up globally (easy, frictionless access to dollars), and you hardwire global demand for dollars, and demand for Treasuries.

 

That cements the dollar's dominance.

 

Also due to be presented at this conference tomorrow, is a study on foreign-currency funding risk. It lays out, in plain numbers, how the world will run short of a currency it can't print. It's talking about the dollar. 

 

And that's of particular interest, because, as we know, Kevin Warsh (the new Fed Chair) wants to end the Fed's QE business. Moreover, as we've discussed for the better part of the past year, the Warsh era will likely bring scarcer, more politically governed access to dollars (dollar swap lines).

 

With that, are we beginning to see the repricing of the dollar? From something the world had, and expected access to, to something more scarce, that is earned through political alignment?

 

Remember, pretty much everything is under review, as the new Fed Chair said last week.