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- Week in Review (Video) – August 26, 2016
- Timing of Fed Interest Rate Increase Still in Question
- The Daily Market Report: Gold Turns Choppy As Yellen Confuses
- Gold retreats back into the range as market can’t quite figure out what message Yellen was trying to convey.
- Gold Extends Gains as Yellen Sees Rate Rise ‘Over Time’
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Category: U.S. Dollar
Gold has retraced half of today’s intraday retreat, dollar rebound falters as markets discounts Dudley’s hawkish bluster.
10-Aug (Reuters) — The dollar fell against a basket of currencies on Wednesday as investors re-evaluated whether the Federal Reserve will raise interest rates this year, which also sent the higher-yielding Australian dollar to its loftiest level since late April.
The U.S. dollar sagged against the euro and the yen after downbeat productivity data sapped some of the momentum it had gained from last week’s robust jobs report.
U.S. Treasury yields fell after the productivity report suggested the economy may not be growing as quickly as anticipated, prompting investors to cut long-term inflation expectations. According to CME’s Fedwatch, investors have trimmed chances of a rate rise in December 2016.
The dollar was down 0.6 percent at 101.28 yen, having gone as high as 102.66 on Monday on the strong non-farm payrolls data. The euro rose 0.5 percent to $1.1173, touching a 5-day high of $1.1184.
The dollar index dropped 0.6 percent to 95.577.
“The release of the third consecutive decline in quarterly U.S. productivity – the worst run since at least 1980 – does not bode well for the prospects for the dollar,” Morgan Stanley head of currency strategy, Hans Redeker, said.
PG View: The dollar has retraced all of its post jobs report gains. Odds of a September rate hike are back down at 12%.
20-Jul (MarketWatch) — Think of it as the breakup. Gold’s historical relationship with the U.S. dollar has been going through a bit of a separation.
The precious yellow metal often trades inversely with the ICE U.S. Dollar Index a gauge of the dollar’s strength against a basket of six rival currencies, as moves in the U.S. unit can influence the attractiveness of gold to holders of other currencies. In other words, gold tends to rise when the dollar weakens.
However, that normally tight relationship has been under some serious stress, lately.
Some market participants point to global central-bank monetary policies and the U.K.’s decision to exit the European Union for the shift in the relationship, which has seen gold, at times, swing higher or lower, despite moves in the buck.
“You can trace the shift to positive correlation between gold and the [dollar] back to the Brexit vote,” Paul Wong, senior portfolio manager at Sprott Asset Management, told MarketWatch.
…“Since the Brexit result, the correlation has been rising to [new] multiyear highs,” said Wong. “Historically the negative correlation between gold and USD was very pronounced—the only time positive correlation occurred was during times of extreme financial stress when both assets were considered to be safe havens.”
That was the case during the financial crisis of 2008, when gold and U.S. dollar traded “hand in hand,” said Nico Pantelis, head of research at Secular Investor.
“Today, the U.S. dollar is trading relatively high, but gold is getting a [bid] as investors are buying gold again in large amounts,” he said. “So today, the price of gold is trading as a function of demand, like it normally should.”
PG View: Today the old inverse correlation seems to have returned. We’ll see if it lasts . . .
19-May (Bloomberg) — As soon as the Federal Reserve released meeting minutes describing a weaker dollar, the currency surged to a seven-week high.
That’s the dilemma facing U.S. central bankers, who are weighing economic data to determine when next to raise interest rates. The Fed’s signals of a potential June move may backfire if the resurgent greenback undermines growth and weighs on stocks and oil prices, ultimately eroding the case to boost borrowing costs.
The dollar’s surge since mid-2014 hurt the outlook for growth and inflation, and contributed to the Fed delaying to December its liftoff from near zero, according to strategists. Officials from Janet Yellen to Stanley Fischer have warned that the dollar’s appreciation will limit the pace of tightening.
“The Fed’s in a bind,” said Douglas Borthwick, the New York-based head of currencies at Chapdelaine & Co., a unit of the British interdealer brokerage Tullet Prebon Plc. “The Fed can’t raise rates because it means a stronger dollar, and it means deflationary pressure in the world. The Fed’s under pressure to talk a mighty game, but it can’t actually do a lot.”
…“The Fed’s very thought of a June increase — much less the signals it may have been trying to convey to decrease the risk of complacency — could reverse some of the very trends they liked so much,” said Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee.
20-Apr (Bloomberg) — When it comes to the dollar’s slump this year, history is repeating itself.
The greenback has fallen 4.2 percent against the euro this year and it’s likely to keep plunging until at least the end of the quarter, according to SEB AB, Sweden’s fourth largest lender. That’s because the U.S. currency tends to weaken during the months soon after the Federal Reserve commences raising interest rates, as the central bank did in December.
“We really don’t see any positive driver for the dollar right now,” Richard Falkenhall, a currency strategist at SEB, said by phone from Stockholm. “t’s really hard to come up with a story where you could expect the dollar to recover.”
Strategists have lowered their outlooks for the currency, while hedge funds all-but abandoned net bullish bets this year after Fed Chair Janet Yellen signaled the central bank would act “cautiously” as it looks to raise rates. That’s capped a 20 percent surge during the past two years on expectations that the Fed would tighten monetary policy in contrast to easing by its biggest counterparts in Japan and Europe.
PG View: It also goes to show that months of headlines touting the demise of gold in the face of tighter policy was all a bunch of hooey!
18-Mar (Bloomberg) — The dollar headed for its steepest three-week slide in more than four years as an increasingly cautious Federal Reserve spurred analysts and investors to reassess forecasts for the greenback.
A Bloomberg index tracking the U.S. currency against 10 major peers climbed from an eight-month low reached Friday, two days after Fed officials unexpectedly cut projections for interest-rate increases to two this year from the four they estimated in December. Macquarie Bank Ltd. and Morgan Stanley, two of the world’s top 10 currency forecasters, are highlighting the risk of more dollar weakness.
“The fact that they didn’t raise rates and wound back expectations for future increases in 2016 has obviously hurt the U.S. dollar,” said Derek Mumford, a director at Rochford Capital Pty in Sydney. “That can continue in the very near term.”
…“The Fed has become much more dovish — the market realizing maybe the Fed being a little bit more behind the curve,” Dominic Schnider, the head of commodities and Asia-Pacific foreign exchange at UBS Group AG’s wealth-management unit in Hong Kong, said Friday in a Bloomberg Television interview. “That’s simply not good for the dollar, and so we have this generic dollar weakness right now which will not disappear in the very short term.”
PG View: As we’ve been saying for some time now, the relative strength of the dollar is killing U.S. exporters and weighing on the economy as a whole. With other central banks aggressively easing, there was really no reason for the Fed to continue down the “normalization” path. Policy was simply becoming too divergent. In holding steady, the Fed is being plenty hawkish . . .
03-Mar (Reuters) — The U.S. dollar was set to post its biggest one-day percentage decline against the euro in more than three weeks on Thursday after data showing a decline in U.S. service sector employment added to worries over Friday’s monthly U.S. jobs data.
The euro gained more than 0.5 percent against the greenback to a session high of $1.0938, rebounding from a more than one-month low of $1.0823 Wednesday and putting the dollar on track for its biggest daily percentage loss against the euro since Feb. 9.
The Institute for Supply Management (ISM) said its employment index fell to 49.7 in February from 52.1 a month earlier, marking the first fall in service-sector employment since February 2014.
Traders had already bought euros and sold dollars ahead of the ISM data to brace for a potentially weaker-than-expected U.S. Feb. non-farm payrolls figure on Friday. Economists polled by Reuters expect U.S. employers to have added 190,000 jobs last month.
The data intensified concerns about the U.S. labor market and further dampened expectations that the Federal Reserve would hike interest rates any time soon, analysts said. Fed hikes are expected to boost the dollar by driving investment flows into the United States.
“The data this morning was weak enough to add a touch of concern to the market,” said Jason Leinwand, managing director at Riverside Risk Advisors in New York. “The market is definitely leaning away more and more from the prospects of a Fed hike this year.”
17-Feb (WSJ) — These are strange monetary times, with negative interest rates and central bankers deemed to be masters of the universe. So maybe we shouldn’t be surprised that politicians and central bankers are now waging a war on cash. That’s right, policy makers in Europe and the U.S. want to make it harder for the hoi polloi to hold actual currency.
Mario Draghi fired the latest salvo on Monday when he said the European Central Bank would like to ban €500 notes. A day later Harvard economist and Democratic Party favorite Larry Summers declared that it’s time to kill the $100 bill, which would mean goodbye to Ben Franklin. Alexander Hamilton may soon—and shamefully—be replaced on the $10 bill, but at least the 10-spots would exist for a while longer. Ol’ Ben would be banished from the currency the way dead white males like him are banned from the history books.
Limits on cash transactions have been spreading in Europe since the 2008 financial panic, ostensibly to crack down on crime and tax avoidance. Italy has made it illegal to pay cash for anything worth more than €1,000 ($1,116), while France cut its limit to €1,000 from €3,000 last year. British merchants accepting more than €15,000 in cash per transaction must first register with the tax authorities. Fines for violators can run into the thousands of euros. Germany’s Deputy Finance Minister Michael Meister recently proposed a €5,000 cap on cash transactions. Deutsche Bank CEO John Cryan predicted last month that cash won’t survive another decade.
The enemies of cash claim that only crooks and cranks need large-denomination bills. They want large transactions to be made electronically so government can follow them. Yet these are some of the same European politicians who blew a gasket when they learned that U.S. counterterrorist officials were monitoring money through the Swift global system. Criminals will find a way, large bills or not.
The real reason the war on cash is gearing up now is political: Politicians and central bankers fear that holders of currency could undermine their brave new monetary world of negative interest rates. Japan and Europe are already deep into negative territory, and U.S. Federal Reserve Chair Janet Yellen said last week the U.S. should be prepared for the possibility. Translation: That’s where the Fed is going in the next recession.
PG View: Governments don’t want you hoarding cash outside the banking system, even if you may have to pay for the privilege of putting into the bank. You should acquiesce to that wish by choosing to save in gold.
11-Feb (Reuters — The dollar hit a 16-month low against the yen on Thursday and headed for its worst week since the Lehman crisis as investors scrambled for relative safety, buying up gold and top-rated bonds and dumping stocks.
Investors were spooked by worries over the direction of the global economy and by cautious comments from the head of the U.S. Federal Reserve that were taken to mean no near-term interest rate hikes.
…”What this shows is that the risk-off mode has come back very quickly and that the worst may still be to come in these markets,” said Rabobank European strategist Emile Cardon.
“What is different to previous times is that the bad news in now coming from everywhere, China, Portugal the U.S. the commodity sector the banking sector. It’s like several smaller crises could combine into one big crisis.”
04-Feb (Reuters) — The dollar was back on the defensive in morning trade in Europe after a collapse in expectations of a further rise in U.S. interest rates this year drove its biggest daily fall in over two months on Wednesday.
Against a basket of currencies, the greenback fell another 0.82 percent to 96.49, having earlier hit its lowest since early November. The euro hit a 15-week high of $1.1233, extending its gains from the dollar’s sell-off a day earlier.
The triggers then were a weak batch of U.S. sentiment data and New York Fed President William Dudley’s warning that a weakening outlook for the global economy would have to be taken into account for upcoming rate decisions.
07-Jan (Reuters) — China allowed the biggest fall in the yuan in five months on Thursday, pressuring regional currencies and sending global stock markets tumbling as investors feared the Asian giant could trigger competitive devaluations from its peers.
China’s stock markets were suspended for the day less than half an hour after the open as a new circuit-breaking mechanism was tripped for the second time this week.
The People’s Bank of China again surprised markets by setting the official midpoint rate on the yuan, also known as the renminbi (RMB), 0.5 percent weaker at 6.5646 per dollar, the lowest since March 2011.
That tracked record losses in the more open offshore market in the currency and was the biggest daily fall since last August, when an abrupt near 2 percent devaluation of the currency also roiled markets.
Dealers, however, said the PBOC had intervened later to reverse a more than 1 percent fall in offshore rates for the yuan after they hit a record low of 6.7600 per dollar.
06-Aug (BusinessInsider) — One of the biggest stories in global markets continues to be the epic rise of the US dollar against the world’s big currencies.
While it’s good news for importers, it’s bad news for exporters. It’s also rough on the US-based multinational companies that do a lot of business overseas. This is why the strong dollar is the No. 1 thing S&P 500 companies have been complaining about.
With the Federal Reserve on the verge of tightening monetary policy with higher interest rates, many economists think the dollar has room to go higher.
“Optimism on the dollar is widespread, and our house view is for further dollar strength,” Credit Suisse’s Andrew Garthwaite said in a new note to clients. He noted that a recent Credit Suisse survey revealed that 70% of investor clients expect the dollar to continue appreciating over the next 12 months.
But what if the consensus is wrong?
In his note — titled “Where could the consensus be wrong?” — Garthwaite identifies reasons why the dollar’s rally may be near its end.
Among other things, he found that history is not on the consensus’ side.
“The dollar has historically fallen after the first Fed rate hike; indeed, the first rate hike on the last 5 tightening cycles was associated with a dollar weakening by around 10% over the following 3 months,” he said.
20-Jul (Reuters) — The dollar jumped to three-month highs on Monday, extending its recent gains as expectations of rising U.S. interest rates gathered pace, while gold prices plunged to their lowest in more than five years.
The greenback posted its best weekly performance in about two months last week, after Federal Reserve Chair Janet Yellen reiterated that U.S. interest rates will probably rise later in the year. Data on Friday showing a pickup in U.S. consumer prices and housing starts also helped the rally.
The strength of the dollar weighed on gold, which plunged as much as 4 percent. Platinum fell as much as 5 percent to its lowest since February 2009.
…Gold dived, touching a five-year low as the U.S. interest rate outlook and its consequences for the dollar led sellers in China dumped the metal.
“The Asian market missed the action on Friday when U.S. players were already attempting a break of $1,130, a major support level, and has pushed prices much lower today,” ABN Amro analyst Georgette Boele said.
08-Jun (Bloomberg) — The U.S. denied that President Barack Obama told fellow Group of Seven leaders the strong dollar is a problem, saying that he made a different point about the need to promote growth including by means of monetary policy.
“The president did not state that the strong dollar was a problem,” the White House said in a statement Monday. “He made a point that he has made previously a number of times: that global demand is too weak and that G-7 countries need to use all policy instruments, including fiscal policy as well as structural reforms and monetary policy, to promote growth.”
Earlier on Monday, a French government official with knowledge of the G-7 discussions at Schloss Elmau in southern Germany said that geopolitical risks including Greece create volatility on financial markets, affecting interest rates and currencies. In that context, Obama had said that the strong dollar posed a problem, according to the official, who asked not to be named because the discussions were private.
27-May (Financial Times) — It’s turning out to be the market’s whipping boy.
After a quiet start, the dollar is once again on the up against the Japanese currency, gaining 0.4% to a new eight-year high for the dollar (and eight-year low for the yen, obviously) of Y123.68. Dollar gains against other currencies have been more muted.
Ian Stannard, a currencies analyst at Morgan Stanley, says this is just the cleanest way to express a ‘strong dollar’ view, particularly as this particular currency pair is so sensitive to shifts in US debt yields. The fact that bets against the yen have been so much less crowded than bets against the euro recently also helps.
PG View: The weak yen is bolstering the dollar and weighing on gold in the process.
Gold’s drop today is being broadly attributed to dollar strength, but that is really more a story of yen weakness.
26-May (Financial Times) — The dollar is rallying as concerns about a possible Greek default put pressure on the euro and the yen tumbles to seven-year lows, while in equities Wall Street and Europe are soft despite greater China’s surge to multiyear highs.
…The dollar is up 1.3 per cent to Y123.14, leaving the yen on course for its weakest close since the summer of 2007 as traders contrast the divergent monetary policies of the Fed and Bank of Japan, where the latter is continuing a mammoth quantitative easing programme.
The yen’s move is exacerbated by its burst out of a multimonth range, releasing a surge of momentum, amplified by protective “stops” being filled.
19-Mar (MarketWatch) — The U.S. dollar’s eight-month long roller-coaster ride is about to head downhill, analysts at HSBC said Thursday.
Strategists at the British bank have raised their euro forecasts, becoming the first major bank to predict a resurgent euro by the end of next year. They now see the euro rising to $1.10 by the end of next year — and $1.20 by the end of 2017.
That is a contrast with a dour forecast from Goldman Sachs issued just last week. Goldman updated their forecast, saying that they saw the euro hitting parity by September, and falling to 80 cents by year-end 2017.
HSBC’s David Bloom, one of the report’s authors, said that while the rally may have some more room to run, the fundamentals suggest that the market has already priced in easing abroad — and is underestimating the potential impact of slowing domestic growth.
“People are saying we don’t have to worry about data because the central banks are anchored — but currencies aren’t just about interest rate differentials, they’re not just about policy differentials,” Bloom said. “The U.S. economy is surprising to the downside aggressively. Don’t ignore it.”
18-Mar (Xinhua) — China and Germany conducted their first high-level financial dialogue here on Tuesday and agreed to strengthen macro-economic policy coordination, hold policy dialogue and promote pragmatic cooperation in fiscal and financial areas.
China’s Vice Finance Minister Shi Yaobin told Xinhua that the fruitful results of the First China-Germany High Level Financial Dialogue, which lasted one day, show new highlights of fiscal and financial cooperation as well as future cooperation between the two countries.
…The Chinese official also underlined some of the most noteworthy consensuses reached at the dialogue, including Germany’s support for China’s goal to add its currency renminbi (RMB) to the Special Drawing Rights (SDR) currency basket based on existing criteria.
Germany will also “actively support China in hosting the G20 summit in 2016,” Shi added.
At the dialogue, Germany also announced its intention to join the Asia Infrastructure Investment Bank (AIIB) as a prospective founding member, which was welcomed by China.
…They also supported the establishment and development of an offshore RMB market and a local RMB clearing bank in Frankfurt and welcomed German financial institutions using RMB qualified foreign institutional investors (RQFII) quota to invest in Chinese markets.
…The event marks an important milestone in China-Germany financial cooperation after bilateral endeavor to make Frankfurt a renminbi clearing hub, said Loechel.
PG View: China and its currency are clearly ascendent, and much of the gains will likely come at the expense of the dollar.
13-Mar (WashingtonPost) — The last time the dollar was worth more than the euro was all the way back in December 2002, just three years after the common European currency came into existence. But in the years after that, the Euro gained strength as the continent imported less and exported more. The euro soared to an all-time high of $1.59. It was enough that, in 2007, former Federal Reserve Chair Alan Greenspan wondered if the euro would replace the dollar as the world’s reserve currency–in other words, the benchmark that everyone uses in case of emergency–and even supermodel Gisele Bundchen reportedly insisted on being paid in euros rather than dollars. That’s quite a consensus. But it turns out that these reports of the dollar’s death were greatly exaggerated. Since then, the euro has fallen 24 percent against the dollar in less than a year, and made everyone forget its grand ambitions.
Robert Frost can help us here. Two monetary policies have diverged in, well, not a wood, and Europe has finally taken the path well traveled by. Specifically, to boost Europe’s extraordinary weak economy, the European Central Bank is buying bonds with newly-printed money, aka quantitative easing, while the Federal Reserve is far enough along that it’s getting ready to raise rates. That means interest rates are falling, sometimes into negative territory, in Europe, and, at least on the short end, rising in the U.S. Think about it like this. Would you rather buy a German 10-year bond that pays 0.25 percent or a U.S. 10-year bond that pays 2.1 percent? Investors, especially big European ones, are answering that by moving their money out of euros and into dollars. And voilà, the euro has fallen from $1.39 last year to $1.06 today.
PG View: When you look at a longer term dollar index chart though, the greenback is just past the halfway-back point of the long-term downtrend off the 2001 high. Going back further, the recent rally to 12-year highs is barely a blip within the very-long-term downtrend.
12-Mar (Wall Street Journal) — The stronger U.S. dollar has hurt exporters and could dampen their investment plans for next year, top business executives said in a new survey.
The quarterly Duke University/CFO Magazine Global Business Outlook Survey, released Wednesday, polled about 1,000 business executives–mostly CFOs–around the world.
Two out of three big U.S. exporters–those with at least one-fourth of their total sales overseas–said the appreciation of the dollar has had a negative impact on their businesses. And nearly one-fourth of big exporters said they have reduced their capital spending plans as a result.
Executives across many sectors–from construction to manufacturing to healthcare–pointed to the strengthening U.S. dollar against most major currencies as an emerging risk that has developed over the past six months.
“We are in a midst of an ugly contest to see whether the eurozone, Japan or Canada can depreciate the most against the U.S. dollar, and China is probably next,” said Campbell R. Harvey, a professor at the Duke Fuqua School of Business and a founding director of the survey. “U.S. exporters are being punished by these competitive depreciations and this will lead to lower profits and less employment.”
• Only 23% of European CFOs believe the European Central Bank’s quantitative easing program will actually increase inflation.
PG View: I’m surprised they could find 23 out of 100 CFOs that believe QE will work. Japan has been doing it for 15-years and the U.S. and UK have been doing it for more than 6-years without attaining their inflation goals. Why would those CFOs think the ECB is going to have any better luck?
10-Mar (MarketWatch) — The strong dollar is undoubtedly a headwind for the U.S. economy, said White House chief economist Jason Furman on Tuesday. In a speech at the National Association of Business Economics, Furman said the headwind from the strong dollar was largely counteracted by the lower price of oil. He said the administration was continuing to be vigilant about risks to the economy from overseas. The headwind from the dollar was “another reason” to strengthen the 87% of the domestic economy that is unrelated to exports, Furman said. White House officials don’t often comment on the dollar.
PG View: Is the White House now exerting pressure on the Fed not to raise rates this year, for fear the headwind will turn into a full-force gale?
24-Feb (Bloomberg) — Emotion is trumping the dollar in the gold market.
Every quarter for the past three years, the metal has moved in the opposite direction of the currency. That trend is being upended in 2015. Investors have bought bullion as a hedge against political turmoil in Europe, even as the dollar rose on prospects of higher U.S. interest rates. The inverse correlation between the two assets, which in December was the strongest in a year, is now half of its average over the past decade.
The risk of a default by Greece that could unravel the European Union helped fuel demand for gold as a haven and boosted market volatility. While bullion pared some gains this month as Greece negotiated an extension of a bailout package, holdings in exchange-traded funds backed by the metal rebounded from a five-year low in mid-January to the highest since October, even as the Federal Reserve signals its first interest-rate increase since 2006.
“Gold at the moment is being driven by the fear factor — it rises when euro-zone uncertainty increases, and falls when it decreases,” Rene Hochreiter, a mining analyst at Noah Capital Markets (Pty) Ltd., said by phone Tuesday from Johannesburg. “Last year, gold’s fate was much more tightly bound to the dollar and the outlook for quantitative easing, but that trade is no longer the dominant one.”
by James Rickards
06-Feb (DailyReckoning) — The same force that made the dollar the world’s reserve currency is working to dethrone it.
…But once the sterling lost its lead reserve currency role to the dollar, inflation exploded. The index hit 757.3 by 2005. In other words, during the 255 years of the index, prices increased by 200% in the first 185 years while the sterling was the lead reserve currency, but went up 5,000% in the 70 years that followed.
Price stability seems to be the norm for money with reserve currency status, but once that status is lost, inflation is dominant.
The decline of the dollar as a reserve currency started in 2000 with the advent of the euro and accelerated in 2010 with the beginning of a new currency war. That decline is now being amplified by China’s emergence as a major creditor and gold power. Not to mention the actions of a new anti-dollar alliance consisting of the BRICS, Iran and others. If history is a guide, inflation in U.S. dollar prices will come next.
In his 1925 poem The Hollow Men, T. S. Eliot writes: “This is the way the world ends/ Not with a bang but a whimper.” Those waiting for a sudden, spontaneous collapse of the dollar may be missing out on the dollar’s less dramatic, but equally important slow, steady decline. The dollar collapse has already begun. The time to acquire inflation insurance is now.
09-Feb (Bloomberg) — Treasury Secretary Jacob J. Lew said the strength of the dollar will be discussed among Group of 20 finance ministers meeting in Turkey this week and the growing U.S. economy still needs to produce higher wages for workers.
“We’re getting some benefit now from oil prices in terms of the economy getting a bit of a boost on top of that,” Lew said in an interview Sunday in Washington, with excerpts airing Monday on CNBC. “So I’m feeling pretty confident that we’re looking at a good period ahead.”
G-20 officials said in a draft communique that monetary policy needs to stay accommodative to support a pickup in growth, without mentioning currency issues. Lew said the U.S. dollar is “stronger than a lot of the economies that we compete with” and “the real challenge is getting other economies to get back in the growth pattern where they’re doing better,” according to an article on CNBC’s website.
The U.S. still needs “more wage growth that people can really feel,” he said.
28-Jan (MarketWatch) — The U.S. dollar’s strong rise is getting a lot of the blame for the stock market’s recent weakness, but there’s more to it than a simple inverse relationship between the U.S. currency and equities.
…Lena Komileva, chief economist at G-plus Economics in London, argued in a note back on Jan. 16 that the dollar’s recent performance reflects growing global anxiety.
…“In this context, U.S. dollar strength reflects rising international systemic risk rather than cyclical normalization in global economic conditions,” Komileva said. “The dollar’s rise has become a symbol of the de-globalization of capital and rising credit market distress and financial volatility, rather than a sign of U.S.-led normalization in global yields.”
A stronger dollar is reinforcing “the market’s intense focus on global disinflation, demand shortages and financial default risk,” she said.
PG View: This goes a long way toward explaining the recent correlation between gold and the greenback.
02-Jan (Bloomberg) — The dollar strengthened before reports that may reinforce speculation the Federal Reserve is on course to raise interest rates this year while other central banks extend stimulus measures.
The U.S. currency climbed versus all its 16 major peers in 2014 and extended those gains today. The euro reached a 4 1/2-year low after European Central Bank President Mario Draghi said he can’t exclude the risk of deflation in the currency bloc and signaled that the likelihood of large-scale quantitative easing is increasing. The pound fell after a report showed U.K. manufacturing growth unexpectedly slowed last month.
“We are seeing an extension of ongoing themes,” said John Hardy, head of foreign-exchange strategy at Saxo Bank A/S in Hellerup, Denmark. “It’s all about continued improvement in the U.S. and whether that first Fed rate hike is moved forward. Then there’s the anticipation of the ECB launching an easing program.”
26-Sep (The Wall Street Journal) — A recent spike in the U.S. dollar is unlikely to put sufficient downward pressure on import prices to have a significant negative effect on inflation, according to researchers at the Federal Reserve Bank of Cleveland.
The U.S. dollar has been on a tear, hitting a four-year high against a basket of major currencies Thursday amid mounting expectations the Federal Reserve will raise interest rates next year while its counterparts in Europe and Japan consider further measures to raise inflation and spur growth.
02-Sep (ZeroHedge) — Imagine this scene:
“Everyone in the country was in shock. People’s net worth had devalued more than 53% overnight.”
“The value in savings accounts dropped in half and neither merchants nor consumers knew how to react because they had never been through something like it before…”
This is how an American business executive described living through Mexico’s devaluation of the peso exactly 38 years ago on September 1, 1976.
Looking back, it was so obvious.
Mexico had a mounting debt, destructive policies, and a woefully unsustainable fixed exchange rate with the US dollar. All the writing was on the wall.
But most people ignored the warning signs and kept their money in pesos.
Mexican President Luis Echevarria even went out on the radio to reassure people that the currency was safe.
Finally, under intense fiscal pressure, the government reached its breaking point. And on August 31, 1976, they made the decision to devalue the peso.
People woke up the next morning on September 1st to a 50%+ decline.
…Looking back, it’s all going to seem so obvious. If a major, global currency crisis hits within the next 12-months, people will think, “duh, how did I not see that coming?”
Unfortunately by then it will be too late.
It takes only a little foresight and planning to insulate yourself from an event that can have disastrous consequences.
If you knew the Mexican peso was at an unsustainable level, why would anyone continue to hold pesos?
Similarly, if all the objective data suggests that the dollar is in store for an epic decline… and that the entire world is on a path to shift away from the dollar, why in the world would any rational person base his entire life savings in dollars?
19-Jul (Telegraph) — In early July 1944, delegates from 44 countries gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire. A three-week summit took place, at which a new system was agreed to regulate the international monetary and financial order after the Second World War.
The US was already the world’s commercial powerhouse, having eclipsed the British Empire several decades earlier. America was also on course to be among the victors of “Europe’s conflict”, even though its economy was largely unscathed by war. As such, Bretton Woods was US-dominated and produced a settlement largely on US terms.
Seventy years ago this week, that fateful summit ended. Its close marked the moment the dollar’s unquestionable supremacy was secured. Since then, global commerce has been conducted largely in dollars and leading economies have held the greenback as their primary reserve currency.
…The advantages this system bestows on the US are enormous. “Reserve currency status” generates huge demand for dollars from governments and companies around the world, as they’re needed for reserves and trade. This has allowed successive American administrations to spend far more, year-in year-out, than is raised in tax and export revenue.
…The dollar’s status is a big question. Judging the outcome is more akin to star-gazing than scientific economics. But the establishment of this BRIC Development bank, timed to coincide with the anniversary of Bretton Woods, is an audacious and significant move. The world’s emerging giants now have thumbscrews on the West.