This Is The Setup for a Historic Currency Crash

The euro has soared against the dollar recently, but for all the wrong reasons. It has left the exchange value basically over its skis relative to practically everything else. And therefore, it's highly susceptible to a possible reverse, maybe even setting up for something like a crash. And in this case, and in this shape, it may not take all that much to trigger one. Now, to be clear, we're not talking specifically about the euro dollar system, even though both of these currency denominations belong to it. What the relative change in currency exchange values of the European common currency to the dollar can give us is some sense of how money and collateral are flowing within that system. And in this case, it's almost entirely speculative, which has seemingly trapped a whole bunch of speculative traders on the same side of the trade. And that trade is sell America. Now, sell America isn't real, but many people, especially institutional investors, are trading like it is getting way ahead of themselves simply because they're misreading the other side of April. We got a Bloomberg article today trying to figure out why mainstream currency models don't seem to be working too well anymore. To see what I mean about all this, I have to untangle reality from narrative, starting with what the U.S. dollar is actually doing. As per usual, it's not what everyone says it is. The dollar's exchange value against pretty much everyone else that's not the euro looks vastly different because the dollar spiked last year on risk aversion. Then once we got to tariff delays and trade deals, the risk aversion came down a little bit, leaving the dollar exchange value basically where it was when everything started. But as it was coming down and going lower, that fed into the sell America narrative, which is mostly a political one. And all this is another reason why I'm having a webinar this coming Thursday at 6 p.m. Eastern Time, because we need to sort out the fundamentals from these narratives, from these misconceptions, and the so many biases of all the worst kinds. We've got exclusive material that's usually reserved for you at Alley University subscribers because there's just simply too much that we just can't get into here on YouTube. And with the swap market in particular maintaining huge moves, that does provide us with a solid foundation for our analysis, a fundamental foundation. You'll see exactly what I mean this coming Thursday, and there's a link in the description of this video to sign up for our webinar. I hope to see you on Thursday, 6 p.m. Eastern Time. Now to Bloomberg. Bloomberg is where we start for the story on the euro that comes from the euro dollar. But in this case, we're focusing on exchange values of the European common currency because it doesn't fit with anything else. And that's what Bloomberg is even here to tell us. Some of Wall Street's tried and true currency strategies aren't working anymore, and it's baffling even the most seasoned traders. Before President Donald Trump's policy sent the dollar plunging, investors could reliably use a number of indicators to figure out how to trade. And maybe I'm just spitballing here. Maybe President Donald Trump's policies didn't actually send the dollar plunging. First of all, because the dollar isn't really actually plunging. What's really going on with the dollar? Well, for most people, that starts with Dixie or DXY, which is already misleading because more than half of it is allocated to the euro itself. And as of this morning, DXY was around 97.33, which is up a little bit, not a whole lot from its July 1st low of 96.82, which happened to be its lowest index value since March of 2022. So therefore, you have a more than three year low on DXY, which equals to this mainstream narrative, the dollar must be dying. But if you look beyond the euro or indexes that are heavily influenced, so heavily influenced by the euro, what you see is a very different picture. Start with just trade weighted indexes and the Federal Reserve puts together and compiles a couple of different versions. In the broadest trade weighted index, which is still heavily allocated to the euro, just not as heavily as DXY, that one has dropped from a peak of around 130 back in mid-January around the top to around 121 at the last calculation by the Federal Reserve, the last calculation that we have access to. So that shows how far back the seller narrative goes and how detached it has been from reality. If we move specifically to the index that focuses on emerging market economy currencies, we see there is quite different. It had a record high at almost 140 for that index on April 9th. That was the final dollar spike on deflationary conditions, risk reversion. Since then, on tariff delays and trade deals, at least a prospect for trade deals, that's brought this index back down to 133, which, as you'll note, is back to where it had been last summer and fall before the currency crisis spike at the end of last year. That was the dollar shortage erupting as euro dollar money providers tightened up in extreme way as the potential economic and financial fallout from trade wars, combining with the fragile global economy at the time, it unleashed this huge wave of risk aversion, which took it to utter extremes by January. And then they pushed those extremes again in late March and early April with the liquidations and deflation that broke out at the time. Since then, on the other side of April, the euro dollar world has unwound those extreme positions, taking the dollar exchange value against most of the rest of the world outside of Europe, back to where it all started last year. That's hardly some unique proposition where the dollar is collapsing in value, hardly reflective of the entire world selling against America. I mean, the dollar hasn't even fallen. It's merely retraced the worst of its last spike, mainly in hopes that these trade deals do get struck and therefore removes the worst possible cases, those worst cases which had propelled the risk aversion and the dollar higher at the start of what really is a mini cycle. In fact, the emerging market index is right now sitting just below its 2022 highs. Yes, its 2022 highs back when everyone was wondering if the dollar bull was ever going to end. Perspective and context matters here. So while the dollar exchange value is coming down, it's coming down from an exceptionally high level and it's only retracing the worst possible cases, not all of the bad cases, just some of the worst possible cases, not necessarily taking them off the table, which gets us back into the discussion with the euro. But you can also see this in individual currencies and it's not even just emerging market currencies, individual developed economy currencies. Let's start with the New Zealand dollar. That one was weak and hovering around zero point six zero to the dollar last year on recession in New Zealand, plus the rest of the forgot how to grow global economy rate cuts from the from the Reserve Bank of New Zealand. And then it plunged late in twenty twenty four to nearly zero point five five. But then, like the emerging market index, since early April, it has climbed back to zero point six zero, which is basically where it had been at the start of this mini cycle. But the Canadian dollar, the Canadian dollar is certainly not an emerging market economy currency yet. Just like the New Zealand dollar in the emerging market index, the Canadian dollar had been around one thirty five to one thirty six pretty much all last year until October. Then it started falling apart, got to around one forty four in January, stuck in that very low range until April. Then once we got the tariff delays and the prospects for trade dealers that allowed it to begin retracing on some of the same hopes that the deals will get done in the worst cases won't emerge. And right now, the Canadian dollar is right back to around one thirty seven and one thirty eight plunging U.S. dollar soaring Canadian dollar. No, only retracing that worst last step. I'll give you one more to one more individual currency. Korea's won. The one was as weak as 1380 in the middle of last year and actually rebounded, moved higher to nearly 1300 with the yen carry trade reversal in August and September. But then it crashed all the way to 1478 by January. And it stayed around that range, just like the Canadian dollar, New Zealand, New Zealand dollar until April. And we're sensing a theme here. But then it unwound with all the tariff delays and prospects for trade deals until getting to around 1370 over the past month, where it has largely remained soaring. No, like the others, it's retracing those previous fears over the worst of the worst cases. Korea's won like Canada's dollar, like New Zealand's dollar. They're all relatively weak. They remain relatively weak, just like the emerging market index. Nothing has really changed except for that last worst, most extreme step up until April. So the dollar has come back down from that extreme and hasn't come back down all that much. We're just basically back to the beginning for this overall cycle. That's not sell America at all. That's just a slight recalibration in risk perceptions. And so that puts the euro so far out of line with basically everything. And the sell America idea simply became a self-fulfilling prophecy. As the dollar began to normalize off of those April extremes, the sell America idea gained currency, pun intended, largely due to, let's be honest, partisan purposes. And let's be clear and fair here. Both sides do this every time and is so incredibly unhelpful. Whenever the dollar is moving lower, even if it's just off an enormous high, like we see here, the other side is always going to blame the current administration's policies for wrecking a dollar that isn't anywhere close to being wrecked. For the entire four years of the Biden administration, Republicans claimed it was weaponizing the dollar, leading to its imminent demise. Now everything is flipped and Democrats and those aligned with Democrats are all over the place saying trade wars are forcing the rest of the world to sell the dollar and to sell America. And you'd be surprised at how much institutional Wall Street falls into that category, especially the financial media. So that's the first and greatest mistake with the sell America FOMO that's going on with the euro. People want to believe it for partisan purposes. They're selling, they're selling the dollar and buying the euro on emotion, not analysis, not rational sense, not fundamentals. So everyone rushed to sell America, at least where the euro was concerned, hoping to get in on the ground floor of what they thought was going to be the euro's permanent soaring. And now it's all momentum, which has completely obliterated any sense of these fundamental relationships. So we can go back to the Bloomberg article that I referenced earlier in this video. What it says is that Bloomberg anyway, can't make sense of it from their emotional, highly biased perspective. As the article goes on, Europe cuts interest rates, sell euros, markets look jittery, buy dollars, oil prices spike, trying to snap up currencies from commodity exporters. But now those signals are misfiring more frequently. Traders at UBS Group in Missouho say the models that they use to count on getting it right are instead getting it wrong. And the new forces driving currency markets, like the broad shift of money out of the U.S. and foreign investors buying dollar hedges, are hard to track because the data is sparse, making it tough for professionals to adjust their systems. And therefore, maybe you're just making up and filling it in with whatever it is you believe to begin with. Back to the article. It all shows how experts have been blindsided by the dollar selloff and are now questioning whether the past few months will go down as a chaotic but short-lived adjustment or the start of a harder-to-navigate era. Or that the entire premise is wrong. We don't have the sell America idea. It's not actually happening, that the fundamentals are what they continue to be and that the euro is being driven by, as I said, emotion and momentum, a misreading of the fundamentals and really how currencies really work. As the article itself points out, the euro against the U.S. dollar has completely flipped on rate differentials. How the euro is so far out of whack with those differentials, which do play a bigger role in dollar to euro exchange than almost anywhere else. What we're left with and what's really staring us in the face is that the euro is behaving in ways that are just contrary to everything except for that bias. The bias is believed in too many places around Wall Street that has left momentum shift, pushing the euro higher and higher and higher in almost nothing else, based on the idea that the euro-dollar system renormalizing a little bit after the April spike was somehow legitimizing this sell America idea. So as the euro soars for these reasons have nothing to do with anything in money and macro, it's not showing up in any other market to corroborate its strength, which is why all of these trader models are breaking down. It's not sell America. It's something else entirely. So what happens then? And this is why we're bringing this up today. If trade deals start to fall through, as we're seeing with President Trump sending out letters advising certain countries like Japan that they are going to go, the U.S. administration is going to go through with tariffs because they can't seem to make progress on trade deals. Does that bring some of these bad cases back into the marketplace and therefore lead to the dollar reversing? And if the dollar starts to reverse for fundamental reasons, risk aversion like it did last year, and the euro is way out of whack with everything else, what happens to the euro? Or just the global economy begins to show signs of worsening, if not some of those same worst case consequences. So what the dollar does rise suddenly would appear to be a market that was supported for the narrative gets thoroughly kneecapped, leaving the euro in a Wile E. Coyote moment. So sell America as an idea gets thrown right out the window, meaning the euro will have to itself retrace all the way back to where everyone else is already today. And then, however, farther on the weaker side to make up for any more that the dollar will have risen by the time this convergence really strikes, because at the end of the day, convergence is really tough when you stick out this far. There is no sell America. There is no replacing the euro dollar as a reserve currency, which means preserving the dollar denomination as its primary expression. Part of the problem, a big part of the problem for all of these narratives is that hardly anyone knows what a reserve currency even is, let alone what it is supposed to do. Therefore, why the euro dollar is the only way presently to get any of it done. And by the way, this is not a good thing by any means. I'm not arguing for that. This is not dollar chauvinism, as some people call it. I'm just recognizing the reality, which is the dollar system that we have is the only workable framework for a reserve currency. And therefore, it is prone to these wild swings that people have to fill in their narratives for why the currencies do this or do that, because they don't understand the mechanics of the euro dollar and how that relates to all the stuff that we're talking about here and so much more beyond it. In fact, the entire reason for these dollar spikes like we saw last year in the early part of this year and all the volatility that goes along with it is because the euro dollar itself doesn't work as well as it needs to. The thing is, it does need to be replaced. There's simply nothing out there on the horizon which could remotely fill all the critical roles that need to be filled as a reserve currency. And the biggest myth in all of this is politics, that there is any role for politics in monetary mechanics. The euro dollar doesn't care about Biden or Trump. Even if Trump says he wants a weaker dollar, he wanted a weaker dollar back in 2019 in his first term, too. That never happened because of everything I just told you. Governments don't control money, but they make for a great media story. The dollar does this because the government did that. None of it's true. The reserve currency system has its own way of acting, its own way of behaving. And when you get outside of that mindset and get outside of these biases, you can see and appreciate the information that we get in currency exchange value fluctuations and movements. So as long as we're stuck with the dollar, its value is prone to these wild swings because it is malfunctioning. It doesn't work the way we need it to. And thanks to economics, since no one really knows why this volatility happens, they're going to supply their own narratives. Nature abhors a vacuum. And this is where political hay is to be made. So it's even easier to spin a fairy tale. The fact that so many literally bought it in the case of the euro just goes to show how widespread these biases really are. For the euro, and sell America to a degree, has brought it so far out of line, it sticks out like a sore thumb. And we all know in the marketplace what happens when you stick out and everyone is trapped on one side of that trade. It is at risk of a potentially violent reversal. So all it might take is just a little bit of a flip in the script, a little bit, something to trigger another dollar, dollar move. It doesn't even have to be a surge. And suddenly the euro is Wile E. Coyote. What is a reserve currency? No. What really is a reserve currency? That's something we took a look at in the video link below. As always, thank you very much for joining me. Please join me on July 10th, this coming Thursday, 6 p.m. Link in the description to sign up. Huge thanks to you and our university members and subscribers. And until next time, take care.