Here’s a look at the dollar (Bloomberg USD Index) year-to-date (the decline began immediately following the Fed’s January meeting where all but one member voted to not raise their benchmark interest rate):
click each chart to enlarge, then wait a second and click again…
Let’s layer on Citigroup’s Economic Surprise Index:
How about the Fed’s preferred inflation measure, the core PCE price index (moving in the right direction, yet comfortably below their supposed 2% target):
Now the ISM Manufacturing Survey (hmm…):
And jobs (not that job growth can’t occur amid a strong dollar, but a falling dollar doesn’t seem to hurt):
Oh, and stocks!
Per the above, under present circumstances, a falling dollar can lift many boats. And, with seemingly non-threatening inflation—or a Fed unpublicizingly willing to let (or encourage) it (inflation) to get out ahead (my view)—the Fed has no interest in yet upsetting the applecart.
Ashraf Laïdi, in Currency Trading and Intermarket Analysis teaches us that:
…currencies with higher interest rates characteristically appreciated rather than depreciated on the reward of future containment of inflation and a higher-yielding currency.
And that’s the overwhelming narrative among today’s punditry and is clearly the concept the Fed clings to (thus their hesitancy to raise their benchmark rate). As this 30-year chart (white ovals tell the story) illustrates:
green=dollar, blue=fed funds rate…
Although, later in the his masterpiece, Laidi states that:
The multicurrency performances of 1999-2007 have also proven that interest rate differentials do not always succeed in solely influencing currency values. Other important factors such as global growth, risk aversion, carry trade unwinding, and the direct relationship between commodities and their currencies have had significant weight.
Capital flows are another reason why interest rate differentials may not work in driving currencies.
As illustrated (red ovals) in this chart … (I only highlight where the dollar declined despite a rising fed funds rate [periods when the dollar rose despite a declining fed funds rate essentially make the same point]:
So, will the Fed squander a much needed opportunity to normalize interest rates (I think the data allows for further nudging) in fear of a bulging dollar that, in my (and history’s) view, may not bulge at a time when perhaps better growth opportunities lie abroad (i.e., in other currencies)? Time will tell, and, if so, the market will like it—at least a while longer…
Speaking of the data: Here are the headlines from my “Current Trends” files for March and, as of today, April. It’s not all great, hence I say “nudging” of interest rates: I’ll color code to express their implications:
Wholesale Inventories Way Up
VIX vs High Yield Signals Potential Selloff in Equities
Emerging Markets Equities and Bonds See Huge March Inflows
Wages and Salaries Up as a % of GDP
Profit Margins High But Declining Rapidly
Q4 GDP Positive Revisions
Consumer Data Weaker in February While Inflation Ticks Higher
Short Interest Shows Some Drop But Mixed by Sector
Durable Goods Off But Not Bad in February
Stocks Extremely Overbought
Buyback Blackout Period Begins
Breadth Remains Very Bullish
Stocks: Sentiment Rebounding
Longest Streak of Below 300 Jobless Claims Since ’73
Jolts (Job Openings and Labor Turnover) Report Mixed
Port Traffic Strong
Housing Starts and Permits Up
Regional Manufacturing Surveys Picking Up
Industrial Production Up, ex-energy and utilities
Inflation, via CPI, is Heating Up
PPI, ex-food, energy and services, on the rise
Global Market Overboughtness
Credit Conditions Improving and Bullish for Equities
European Construction and IP Looking UP
Retail Sales Miss
German Industrial Production at 7-year High
Strong Seasonality for Stocks
Charts Still Weak, But Breadth Very Strong
Evidence Does Not Support Bull Market Peaking
Employment is Being Driven By Full-Time Jobs
Average Hourly Earnings Rising
Federal Tax Receipts Rising
Before I finish up with the video below, I’d like to offer some perspective on a weaker dollar:
Consider the labels “weak” and “strong”: When we’re talking about the currency you—the consumer—transact in, what sounds better? Exactly! A “strong” dollar affords you a richer lifestyle. The stronger your dollar the more affordable the stuff the rest of the world supplies you. A “weak” dollar, on the other hand, creates the opposite—the weaker your dollar the more expensive your lifestyle. So, when a political wannabe (or the CEO of U.S. Steel, or a union boss [both contributors to the campaigns of forever pliable political wannabes]) screams foul when a trading partner presumably “devalues” its currency, he/she is not advocating on the American consumer’s behalf, he/she is indeed advocating on behalf of non-U.S. consumers (and big U.S. business, and unions): He/she is essentially saying to other countries “damn it, prop up your currencies so our consumers’ have to pay more and your people can buy more of our exports!”
Back to the present economic/investment equation: The question, again, is, is the dollar dropping because the Fed is walking back its interest rate stance? Or is it dropping because, say, emerging markets and Europe offer greater growth opportunities? Could be a little of both. And, yes, a weaker dollar is indeed—at this juncture—very bullish for the market.
Click the icon in the lower right corner (after clicking the play button) for full screen, then wait a few seconds—or adjust the settings (left of the youtube logo in lower right corner)—to focus.