“The Federal Reserve’s determination to reduce inflation by raising interest rates will make for an ever-stronger Dollar. A strong Dollar is good for America.” – The Lonely Realist
A celebrated Wall Street maxim is that “Whatever might appear to be obvious is obviously wrong.” What seems obvious today is that the US Dollar is destined to go higher. Much higher. Is that wrong?
America’s economy is humming. Despite COVID, internal strife and the hostile actions of America’s enemies, America’s economy remains the strongest in the world. The American Dollar continues to triumph as the world’s reserve currency, blessing America with an “exorbitant privilege” (an accurate description coined by former French President Valéry Giscard d’Estaing). Because of the Dollar’s reserve currency status, the prices of crude oil, gold and wheat … and virtually everything else …, are measured in Dollars. The Dollar is a primary driver of America’s economic health and the grease that lubricates global business. A strong Dollar also means that America’s consumers enjoy a lower cost for goods produced elsewhere, reducing inflationary pressures and making investment in America more stable and, consequently, a more attractive alternative. This draws in global liquidity and drives up demand for American investment in a virtuous circle, further entrenching the Dollar as the world’s reserve currency …, all of which makes the Dollar the King of Currencies!
It therefore is unsurprising that the value of the Dollar has been growing …, +20% this year alone!
The Dollar’s strength has been jet-fueled by the Federal Reserve’s resolve to aggressively attack inflation via increased interest rates and reduced bond buying – Quantitative Tightening (QT). This makes investment in America even more compelling, which has caused the value of the Dollar to soar! With Jay Powell channeling his Paul Volker (as discussed by TLR here), higher interest rates lie ahead … precisely what financial experts and a chorus of financial media have been chanting: Bloomberg, Fortune, Forbes, The Economist and the Financial Times all predict that a powerfully-strengthening Dollar will continue drawing international investment flows into America, motoring the Dollar to ever higher highs. Even though a stronger Dollar will increase America’s trade deficit, that fits in quite nicely with the economic policy goals as explained by Treasury Secretary Janet Yellen: “One of the factors that’s at work pushing up the dollar is a redirection of investments toward higher-yielding returns in the United States. That’s part of how a tighter monetary policy works.” King Dollar therefore has plenty of room to run. Other countries – notably in continental Europe, Great Britain, Japan, South Korea, etc. – that are forced to import Dollar-denominated energy, commodities and food will see high levels of inflation that will weaken their currencies. The U.S., which is energy, food and (largely) commodity self-sufficient, will see a strengthening Dollar amid the trifecta of QT, safe-haven buying and the comparatively favorable performance of the U.S. economy.
In short, there is every reason to believe that the Dollar will continue strengthening against other currencies.
Although the U.S. will be a relative winner, there will be costs. A stronger Dollar will make exports more expensive, creating a drag on U.S. manufacturing, corporate earnings and, consequently, stock market valuations. A stronger Dollar also will adversely affect U.S. multinationals – they derive 30-40% of their revenues from foreign sources. Furthermore, the higher costs to other countries of increasing Dollar supremacy will reduce their economic growth and their demand for U.S. goods and services, which will be a drag on both U.S. exports and the global economy.
The Dollar’s most recent strength can be traced to Chairman Powell’s announcement of aggressive QT. That tailwind would cease blowing, for example, were the Fed to be subjected to high-octane political pressure. That occurred in 2018-19 when President Trump pressured the Fed to cut interest rates and weaken the Dollar, repeatedly pursuing attacks on Chairman Powell: “We have a very strong dollar and a very weak Fed. My only question is, who is our bigger enemy, Jay Powell or [Chinese] Chairman Xi?” More than 100 Presidential tweets culminated in a December 24, 2018 coup de grâce: “The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can’t score because he has no touch — he can’t putt!” The President’s tweet barrage, driven by a weakening stock market, led the Fed to abandon QT and revert to QE. Such a Fed reversal could happen again. The Dollar also could be weakened by macroeconomic and/or geopolitical events or by active interventions by other Central Banks, none of which seem likely in the current environment. However, America’s enemies continue to lie in wait, having positioned their currencies as Dollar alternatives.
TLR has commented on the steps China has taken to promote the Digital Yuan (the “e-cny”) as a medium of international exchange (an effort recently highlighted by The Economist). Cryptocurrencies offer yet another alternative. Should the Dollarization of the global economy overburden non-aligned nations’ economies — as it already has for Russia, Iran and other Axis nations —, bilateral trade agreements in e-cny, Rubles and/or cryptocurrencies offer viable Dollar substitutes, a risk previously highlighted by TLR.
The rapid rise of the Dollar against the Euro, Japanese Yen, South Korean Won, British Pound and other currencies has been unprecedented. Where the economies of most nations for the past number of decades have followed the policy lead of the Federal Reserve, there now is a disconnect with widening imbalances. Deglobalization, the global energy shock, climate change, COVID and the Ukraine War will continue to economically separate America from both allies and enemies. King Dollar therefore will rule …, until, that is, those imbalances topple over either the U.S. or the global economy. TLR readers are familiar with Stein’s Law: “If something cannot go on forever, it will stop.” The Dollar cannot strengthen forever.
An index of TLR titles can be found here.
Finally (from a good friend) – Aphorisms
- It’s not whether you win or lose, but how you place the blame.
- We have enough “youth.” How about a fountain of “smart”?
- A fool and his money can throw one heck of a party.
- When blondes have more fun, do they know it?
- Learn from your parents’ mistakes – use birth control.
- Money isn’t everything, but it sure keeps the kids in touch.
- If at first you don’t succeed, skydiving is not for you.
- We are born naked, wet and hungry. Then things get worse.
- Red meat is not bad for you. Fuzzy green meat is bad for you.
- Ninety-nine percent of all lawyers give the rest a bad name.
- Xerox and Wurlitzer will merge to produce reproductive organs.
- Artificial intelligence is no match for natural stupidity.
- The latest survey shows that three out of four people make up 75% of the population.
- “I think Congressmen should wear uniforms, you know, like NASCAR drivers, so we would know who owned them.” – Robin Williams.
- The reason politicians try so hard to get re-elected is that they would hate to try to make a living under the laws they’ve passed.