Lesson 2
Dollar Strength Regimes
Identify the dollar regime before making any global allocation decision. In strong dollar regimes, favor US assets and defensives. In weak dollar regimes, favor EM, commodities, and international diversification. Watch for regime transitions — they're when the biggest moves happen.
📊 Indicators mentioned in this lesson (click for details):
Dollar strength isn't just a number — it creates distinct market regimes. Understanding these regimes helps you position correctly.
Strong Dollar Regime:
Characteristics:
- DXY above 100, rising
- EM currencies weakening
- Capital flowing TO US assets
- Risk-off tone globally
Who suffers:
- Emerging markets (dollar debt burden rises, currencies weaken)
- Commodity producers (commodities priced in dollars)
- US multinationals (foreign earnings translate to fewer dollars)
- Gold (GLD) (typically) — competes with yielding dollar assets
Weak Dollar Regime:
Characteristics:
- DXY below 100, falling
- EM currencies strengthening
- Capital flowing FROM US to risk assets
- Risk-on tone globally
Who benefits:
- Emerging markets (dollar debt relief, currency strength)
- Commodity producers (higher dollar prices for commodities)
- US multinationals (foreign earnings translate to more dollars)
- Gold (GLD) (often) — alternative to depreciating dollars
Transition Zones:
The most volatile periods are transitions between regimes:
- Dollar topping (strong → weak): Often marks end of crisis, start of reflation
- Dollar bottoming (weak → strong): Often marks end of complacency, start of risk-off
Check your understanding
Lesson Quiz
Quiz Check
It's late 2017. DXY has fallen from 103 to 89. EM stocks are up 30%. Now DXY starts rising. What should you do with your EM allocation?