No. of Recommendations: 5
Wendy,
I noticed Scott Besson touting a strong dollar today at the same time as the Trump administration is threatening the Fed because they are not dropping interest rates. This makes as much sense as denying climate change but threatening Greenland because the polar ice cap is melting and exposing minerals to plundering.
There are a number of ways to look at a "strong dollar". First of all defining what it means. I'm going to say that we are referring to the US Dollar index, a mathematical value related to a combination of ratios to a group of other major currencies (USDX = 50.14348112 × EURUSD^-0.576 × USDJPY^0.136 × GBPUSD^-0.119 × USDCAD^0.091 × USDSEK^0.042 × USDCHF^0.036).
I am also going to write this through the lenses of someone in the US who is evaluating things in the basis of US dollars (as things might look very different if you based the observations on a different currency.
1) Global capital migrates towards countries where the effective interest rate provides a positive return. This tends to develop into c "carry trade". This tends to boost the value of that currency, but the feedback loop applies negative pressure on the very rates which encouraged the flow. This was a major problem for the Japanese economy during its rah-rah days. To give Scott Besson his wish, it would "simply" be a matter of the Fed raising interest rates.
2) The nominal value of earnings by a company doing business abroad (even if they are flat, in terms of local currency), when translated into USD, is increased as the currency those earnings were in rises compared to the US dollar. As these earnings increase (as reported in US dollars), there is an upward pressured on their stock price in terms of USD (though no necessarily in terms of their foreign currency). Therefore, a drop in the US dollar is bullish for stocks doing business abroad which are listed on US exchanges.
3) A drop in the US dollar makes US produced goods, food, service, whatever more affordable and competitive in foreign markets.
4) Bad news: Imported good tend to increase in cost as the USD drops. If they still cost less than producing them domestically, this is inflationary.
5) Real estate costs abroad become more expensive in terms of USD. This possibly concerns some i n the administration
6) There is an impact on the ego of some who think a strong USD is a sign of a strong country. The challenge in this way of thinking is that we are a country of economic tranches where the wealthy spend far less (proportionately) on goods and services than the lower tranches. We are woefully unprepared, both economically and socially to become a true economically strong country (like, say Norway or Switzerland).
From a macroeconomically perspective, the WSJ article is unidimensional and can be misleading.
As you have previously pointed out, the greatest danger to our economic structure is unhedged debt. I believe the rise in gold's price is related to some using it as a hedge against a crack in the USD structure caused by too many cooks in Washington stirring the pot in random directions. While (presumably) none of the readers of these posts is in a position to change that, in order to protect assets evaluated in terms of US dollars, now is the time to contemplate how best to protect the value of accumulated assets in a future relationship to the currency.
Jeff
