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With the Republican Agenda Delayed, It Is Time to Stop Whistling Dixie: Market Recon

Whistling Dixie

The DXY (U.S. Dollar Index) is not something that professional currency traders have very much respect for. Those of us who do trade other financial markets professionally, often refer to the "Dixie" as if it were a broad way to value the U.S. dollar versus it's global competitors. Sometimes we treat it as more significant on it's own than maybe we should.

There are six competitors that make up this basket, and they are weighted unevenly -- very heavily toward the euro, in fact. The weighting toward the euro makes up 57.6% of the basket, so when speaking of the DXY, it is that specific relationship that we are really focusing on, followed in much smaller measures by the yen (13.6%), the pound (11.9%), the Canadian dollar, Swedish krona, and the Swiss franc. Major trading partners such as China, Mexico, and South Korea are not included, so this index is clearly in need of an overhaul, of the kind that has not been done since the creation of the euro.

Now that we understand that we are in fact dealing with an insufficient tool, we will proceed with trying to understand what seems to be collapsing valuations for the U.S. dollar. This is the symptom of a delayed (cancelled?) agenda for the administration in Washington.

That insufficient DXY, though finding some minor support this morning, has been in full retreat. The hard rally for the DXY culminated above 103 in January, which was foretold by TheStreet's own Bruce Kamich in the wake of a Republican sweep of the U.S. elections in November. Shortly after though, U.S. President Donald Trump showed an open preference for a weaker currency at home in an effort to rebuild the U.S. manufacturing sector. The drastically weaker valuation from those lofty levels was also foretold here at TheStreet, this time by Douglas Borthwick. Repetitive legislative failure by the Republican leadership in both Houses has put an exclamation point on the dollar's decline, ironically handing the president exactly what he wanted in the first place.

Back to that DXY, down nearly 7.5% for the year. Wall Street is largely bearish on the dollar now. Promised reforms, such as in the highly publicized healthcare space have forced massive delays on every aspect of an agenda that was supposed to ramp up economic growth through individual and corporate tax cuts, as well as a repatriation holiday...