MacroVoices #391 Brent Johnson: The Dollar Is Not Done
Brent Johnson argues the U.S. dollar bull market isn't over, expecting new highs above 114 despite a year-long pullback. He views geopolitical tensions, Japan's currency crisis, and the massive eurodollar debt market as key drivers that will strengthen the dollar against foreign currencies, even as he expects both dollars and gold to rise together against other fiat currencies.
Summary
Brent Johnson returns to MacroVoices to discuss why he believes the U.S. dollar's strength is far from over, despite a significant pullback from 114 to 99 over the past year. Johnson argues that the dollar hit a blow-off top in September 2022 when multiple foreign central banks intervened simultaneously, but maintains his long-term bullish view. He emphasizes the critical role of the eurodollar market, pointing out that over $30 trillion in U.S. dollar debt exists outside America, making dedollarization equivalent to deleveraging - a process that typically strengthens the underlying currency. Regarding BRICS challenges to dollar hegemony, Johnson acknowledges the bloc's significance but questions their ability to implement alternatives and expects U.S. pushback through diplomatic pressure and sanctions. On geopolitics, he sees escalating tensions between the U.S., Russia, and China as dollar-positive until the U.S. clearly loses military hegemony. Johnson identifies Japan as crucial, arguing the Bank of Japan faces an impossible choice between saving their currency or bond market, likely choosing bonds and sacrificing the yen. This weakness pressures China and could trigger yuan devaluation. He expects the euro to fail at resistance around current levels due to European economic weakness and banking vulnerabilities from holding negative-yielding bonds. Johnson sees potential for both dollars and gold to rise together as all fiat currencies face debasement, and expresses bullishness on agricultural commodities like wheat and corn due to geopolitical supply risks and weather concerns.
Key Insights
- Johnson argues the dollar index will reach new highs above 114, driven by geopolitical tensions and structural factors in the eurodollar market
- The eurodollar market contains over $30 trillion in U.S. dollar debt owed by entities outside America to themselves, making dedollarization equivalent to deleveraging
- Johnson believes BRICS countries lack the ability to successfully implement dollar alternatives and expects U.S. retaliation through diplomatic and economic pressure
- Geopolitical escalation involving Ukraine-Russia or China-Taiwan conflicts would be dollar-positive until the U.S. clearly loses military hegemony
- The Bank of Japan faces an impossible choice between saving their currency or bond market, with Johnson expecting they'll sacrifice the yen to prevent banking system collapse
- Japanese yen weakness puts pressure on China as cheaper Japanese goods compete with Chinese exports during China's deflationary real estate crisis
- Johnson expects the euro to fail at current resistance levels due to European economic weakness and banks holding negative-yielding sovereign bonds
- Both dollars and gold can rise simultaneously as the dollar strengthens against foreign fiat while all fiat currencies weaken against real assets
- Johnson is bullish on agricultural commodities, particularly wheat and corn, due to beaten-down sentiment, geopolitical supply risks, and El Niño weather patterns
- Rising dollar strength historically coincides with global crises, as shown by correlations over the past 25 years
- The mild winter and Putin's grain export allowances in 2022 created favorable crop conditions that may not repeat this year
- Johnson argues that while politicians want to dedollarize, foreign business leaders generally prefer conducting business in U.S. dollars over their home currencies
Topics
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