The dollar keeps on chugging along to higher and higher values. According to the nominal trade-weighted USD index (major currencies), the dollar has gained 1.4% since the Fed raised rates on 12/16/2015. While not a major move, it’s large enough to increase the nominal trade-weighted USD index to a level it hasn’t reached since 2003. The real trade-weighted USD index moved slightly higher in December as well and is now its highest level since November 2002.
However, there is one currency that looks like it could be set to go against the grain and actually strengthen against the dollar over the course of this year. That currency is the Japanese yen. According to the CFTC Commitment of Traders report, net commercial traders have been reducing their long position as they have presumably been selling into this recent yen rally. The yen has quietly already rallied 4.4% since the Fed raised rates and as the first chart below would suggest it looks like it has significant room to run. We may be due for a short-term reversal, and a subsequent increase in net commercial position, but the longer term trend seems to suggest the yen will strengthen. The purchasing power parity backdrop is also conducive to a rally in the yen. According to our model, the yen is about as undervalued as it has been against the dollar at any point in the past 25 years.