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Opinion
Jared Dillian

The Dollar Bulls Are Looking Increasingly Like a Cult

It’s hard to boil the $6.6 trillion foreign-exchange market down into a simple narrative. But that hasn’t stopped people from trying. 

The dollar may be too strong for its own good. 

The dollar may be too strong for its own good. 

Photographer: Karen Bleier/AFP via Getty Images

The U.S. dollar has appreciated against every Group of 10 currency this year. It’s done even better on a longer-term basis, with the Bloomberg Dollar Spot Index rising as much as 16% since May 2021 -- a massive move for a developed-economy currency. Naturally, betting on gains in the greenback has acquired a huge following, even among retail investors, gaining a cult-like status almost equal to the self-described “apes” that cheerlead for meme stock AMC Entertainment Holdings Inc.

If you’ve spent any time on Twitter you might know that thousands of people have subscribed to the “Dollar Milkshake Theory” coined by Brent Johnson of wealth management firm Santiago Capital. The theory is that all fiat currencies are flawed, and ultimately doomed to obsolescence because they are rooted in debt and not backed by any absolute store of value. But the dollar is less flawed than the others, because it is the world’s primary reserve currency and most global transactions, especially in the commodities market, are conducted in dollars. When the Federal Reserve begins to withdraw liquidity from the system via quantitative tightening, it becomes a net seller of US Treasury securities, which serves to constrain the amount of dollars in circulation. At the same time, the demand for dollars is increasing among borrowers who need them to make interest payments on the vast amount of dollar-denominated debt. Hence, the value of the dollar will increase over time.