Dollar Milkshake Theory

What is it and how can we trade it?

I’m not an economist, I don’t pretend to be.

Sure, I understand what’s moving the markets, and am very aware of what traders are looking at and why, but that’s about it.

But now and then I’ll see some economic theory or idea that is really interesting (usually because I start thinking of the trading opportunity around it…)

This time it was the “Dollar Milkshake Theory”

Before we dig in, let’s just take a moment to appreciate the genius of that name… I mean if your objective is to get the theory seen and heard, then Dollar Milkshake definitely gets people intrigued.

The Dollar Milkshake Theory suggest that the United States will attract global capital and strengthen the US dollar by “drinking” the world’s financial resources through its dominant position in the global economy.

I see you scratching your head, I was the same. Let’s get more info.

Luckily there’s a really nice short animated video explaining the theory to us simple price action traders…

Watch this.

Alright, that’s very nice but what are the key takeaways? and what could be a good trade idea?

In 5 bullets this is the theory:

  1. Global Craving for the US Dollar: The world heavily relies on the US dollar for international trade and finance. Vice-like grip.
  2. US Attracts Global Capital: Imagining the global economy as a milkshake, the US has a big straw, pulling investments and capital towards itself. Slurrrp.
  3. US Monetary Policy’s Global Influence: When the US tightens monetary policy, it makes dollars more scarce globally, attracting even more capital to the US. Perfect storm.
  4. Challenges for Other Countries: Other nations may face difficulties obtaining dollars for trade and debt, leading to potential economic issues.
  5. Strengthening of the US Dollar and Economy: The theory suggests this dynamic will bolster the US dollar and the country’s economic position over time.

Ok, so if we buy into that theory what are some trade ideas?

(A side note here, when I talk about trade ideas, I don’t necessarily mean long term trades to set and forget, it might be themes that play out over time we can trade more actively, but aligned with the overall trend.)

Dollar Milkshake potential trades:

Long USD – It might be obvious but buying the dollar seems to be the best play here. Especially if you can pair it up with a weak currency at that moment in time. (maybe an emerging market currency if you are brave…)

Short emerging markets – If the US is sucking in all that investment and capital then emerging markets may suffer. Short plays on emerging market ETFs could be a good option

Does the theory have any merit?

I’ve no idea…

Seriously I haven’t, but… as a trader, my job is to have an understanding of what other players are looking at, what they might be thinking and then how they might be positioning.

If the dollar starts ripping higher and all the press is talking about the dollar milkshake, then I’ll know exactly what people are thinking and how I might want to position myself to benefit.