Could higher liquidity equal a higher US dollar?

During turbulent times, safe haven assets, including safe haven currencies, such as the Swiss Franc CHF and the US dollar USD, tend to outperform other asset classes.

Safe haven assets increase in value during market turbulence in a risk-off environment.  

So the central bank liquidity cycle falls to a trough, peak tightening, and moves to an easing cycle, and a new risk on the secular stock bull cycle begins.

Higher Liquidity Equal Higher US dollar
Safe Haven Assets

Safe haven assets increase in value during market turbulence in a risk-off environment

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The above explains the stocks making all-time highs in early 2024 as investors front load central bank pivot. 

Moreover, we could be in the early stage of a mad dash for any asset that hedges investors from debased currencies. 

The prevalent view is that a risk to the environment equals falling demand for safe haven currencies like the USD. 

The contrarian view, that higher liquidity equals a higher US dollar could be true this time

It is becoming clear by days and weeks the US and its allies are on a war footing. In times of war, fiat currencies perform poorly compared to other assets.

Why? War economies run large public deficits facilitated by accommodating central banks. In other words, war, the most expensive human activity in terms of blood and treasure, is primarily funded by central banks printing cash.

Ukrainian war

“It is becoming clear by days and weeks the US and its allies are on a war footing. In times of war, fiat currencies perform poorly compared to other assets”

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Expanding M2 to manufacture and acquire war materials benefits stocks active in the war economy. The military-industrial complex is the beneficiary of the Fed loosening cycle during wartime. 

High liquidity during wartime weakens all currencies, but the USD is weakened the least by global liquidity increases.  

“With a world at war and improving global liquidity conditions in 2024, USD global capital flows into treasuries and dollar-based assets outperform. US military-industrial complex booms in 2024” – Darren Winters, WIN Investing

The Dollar Milkshake theory supports the view that higher liquidity equals a higher dollar

Central banks are the metaphoric giant milkshake, pouring liquidity into the system, and the USD, with its large straw sucking up global liquidity.

“With a world at war and improving global liquidity conditions in 2024, USD global capital flows into treasuries and dollar-based assets outperform. US military-industrial complex booms in 2024,” Darren Winters wrote in a piece entitled Headlines 2024, dated December 2023. 

With war raging on nearly all continents, the safest place to locate Fabs could be in the US.  

Is the US really in decline?

In 2022, the US share of the global stock market amounted to a massive 58.4%. More than half the world’s stock market capitalization is based in the US in USD denomination.

Mind the gap because no country comes a close second in terms of global stock market amount.

A distant second is Japan, with 6.3%, then the UK 4.1%, China 3.7%, France 2.8% and Germany 2.1%.

The world’s technology park, NASDAQ, goes 24 hours as it trades in India.

A burgeoning number of Indian millennials are taking up stock market investing, many on the NASDAQ.

So higher liquidity equals a higher dollar could hold true. The USD could be the best bet as it benefits from risk off and risk on the environment.  

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