The dollar may have peaked. Last Monday saw a sharply higher...

The dollar may have peaked. Last Monday saw a sharply higher opening for the dollar following the news of the White House’s doubling of tariffs on Turkey. However, over the course of week the dollar traded down and ended up closing on the low on Friday. Selling increased today after Trump stated he was unhappy with the Fed’s rate hikes.

I like to stick to the fundamentals which I believed to be bearish for the U.S. unit all along, but the reversal may have needed a catalyst and Trump’s comments might have been it.

The dollar rally over the past 5 months has been driven by trade war and rate fears. We have seen heavy speculative concentration in short currency, short gold and long dollar. Commercials (producers and dealers) have been on the other side. Speculative concentration in many cases hit multi-year extremes and even record levels. Therefore there is plenty of financing to drive a move in the other direction.

With respect to the rate outlook I do not expect Trump’s displeasure with the Fed to derail the rate hikes. Economic growth continues to accelerate and inflation will continue to build.

Note we did not see even the slightest pickup in capacity utilization in July despite the tariffs. Granted, the tariffs had only been in place for less than a month, but some companies anecdotally mentioned the opening of previously shuttered factories.

Capacity use will be a key factor in gauging inflation going forward. Tariffs lead to price increases and loss of product and if not offset by expanded domestic output inflation could become deeply embedded. Capacity use will be the barometer for this. It could also inform us as to just how competitive the existing spare capacity in the U.S. is. Much investment has been concentrated abroad over the last 20 years so maybe the spare capacity in the U.S. is not competitive. That would mean a longer period of inflation.