Will anything stop the growth of the dollar? DXY analysis

Over the past 10 months, the dollar has appreciated against other major currencies.

Today's extraordinary strength in the dollar comes despite many reasons why the dollar should be weaker. The latest Q1 GDP estimate from the Federal Reserve Bank of Atlanta is 0.9% year on year, one step away from a recession.

Inflation is skyrocketing, which means that real incomes are falling. Politicians like to advertise 5% income growth, but inflation is 7.9%. In reality, the common people are behind.

When you add the nearly doubling of gas and food prices to the fall in real incomes, you get a sharp decline in discretionary income, hurting sales of goods and services across the board.

The US debt-to-GDP ratio is currently 123%, which portends a serious slowdown in economic growth. The budget deficit is out of control. The Fed has stopped printing money and is discussing plans to reduce the money supply. This comes after the first rate hike in more than three years, and more are on the way.

Weak economic growth, falling incomes, high debt and a shortage of money is the perfect formula for a recession.

So why is the dollar rising with such an anchor around its neck? There are two answers.

The first reason why the dollar is strengthening despite weak fundamentals is that all other currencies are worse off. The euro is dragged into a military conflict. Energy prices are skyrocketing, and there is no guarantee that Russia will not stop energy supplies to Europe at any moment.

Russia may be the main villain, but it is Europe's biggest trading partner, its biggest single source of energy, and its main source of food, strategic metals and other resources needed to keep Germany's export machine running.

The second reason is the role of the dollar in the world monetary system. This system is not run by central banks (contrary to what you hear all the time). It is operated by commercial banks and is highly leveraged. The mechanism of this system relies on US Treasuries as the preferred form of collateral to support leverage.

Today, this system is under stress, and the demand for Treasury bills is huge. This factor turns out to be an incentive for the dollar to rise, because it is the dollar that is needed to buy Treasury bills to support the system. This trend will not change anytime soon, even if the US economy is weak.