Posted on 06/28/2024 9:52:50 PM PDT by SeekAndFind
Financial markets generally show no clear direction these days. Accordingly, relatively small movements cause market noise. A few examples happened in the currency market where non-U.S. dollar exchange rates depreciated. While Euro depreciation had its back story of extreme right-wing parties rising in election polls, Japanese Yen depreciation had its story of the central bank (Bank of Japan) not managing market expectations well, Chinese Yuan depreciation had its story of bad outlook, the ultimate result was a strong U.S. dollar, against all.
Many views have listed so many reasons that the U.S. dollar should decline, if not collapse. However, the “cruel” fact is the U.S. dollar is still trading near its historical high.
Based on the well-known dollar index (DXY) compiled by Bloomberg, it has been over 100 for two years already, where most of the time in its history (from 1967 to now), it has ranged between 80 and 100. Directionally speaking, it has been trending up from 2008 to now.
Even in terms of world trade invoicing, central bank reserves, and financial denominations, the U.S. dollar share remains stable.
The strength of U.S. dollar is neither solely political nor solely economic.
U.S. interest rate higher than the others is one force making the U.S. dollar stronger, but a mega wave of inflation and interest rates is generally a global phenomenon that all non-U.S. central banks would act similarly.
It follows that any interest rate differentials are more likely the results of time lag and technical factors than global divergence.
More importantly, the U.S. Dollar is widely used in so many countries that it might not reflect only the U.S. economy and policies but also some global boom-bust factors.
Does the U.S. prefer a strong dollar?
Of course, the U.S. would like to maintain the existing U.S. dollar status, but given the current situation, it might prefer a weaker currency, which would be good for the U.S. economy.
As the accompanying chart shows, whether over the medium to long-run (from 2000 to now) or shorter-run cyclical term, GDP YoY growth moves oppositely to DXY YoY growth.
DXY and U.S. GDP YoY. (Courtesy of Law Ka-chung)
That said, a weaker dollar favours economic growth in both cyclical and decadal terms.
Thus, the U.S. should have no incentive to maintain a strong dollar, which might be a market outcome.
As most financial assets are denominated in U.S. dollars, risk-on/off has been the key factor of weak/strong dollar (at least over the past two to three decades). The recent strong U.S. dollar might reflect a certain reluctance to comprehensive global risk-on. That said, we do see some countries (like the U.S.) and some sectors (like tech) performing well, but this is far from a general phenomenon happening everywhere and at all times. Central banks like the Federal Reserve, Bank of Japan, and the People’s Bank of China have tried hard to intervene, but the effects were short-lived.
Having said that, the long-term real effect on the global economy is largely contained as long as the DXY movement is within plus or minus 10 percent (such as the range of 80-100). At the sovereign level, short-term currency movements are never of any concern.
Find me a greater show of global ineptitude in the history of man beyond the USD still being a safe haven despite $200,000,000,000,000/debt unfunded liabilities.
What we HAVE is fiat money, easily and continuously manipulated by the Federal Reserve Bank by endless printing free additional dollars and deliberately diluting the value of existing dollars.
Specifically, the value of the US Dollar has lost approximately 20% of it's value in the last four years,
When there is uncertainty in the world, people flock to the dollar. When the US is strong and secure, people flock to the dollar.
[Find me a greater show of global ineptitude in the history of man beyond the USD still being a safe haven despite $200,000,000,000,000/debt unfunded liabilities.]
Should the welfare and administrative states be pruned to cut spending? Sure - and the Chevron Supreme Court ruling will help for cutting the latter chunk down to size.
But the linchpin of the nation’s financial health has always been making more and better goods and services than anyone else, not pinching pennies. This is why Republicans have traditionally focused on clearing out the regulatory underbrush over cutting the welfare state, the overwhelming majority of government spending. No one necessarily likes regulators, but everyone loves Social Security, SSI, SNAP, TANF, Medicare, Medicaid, et al. And when voters have had to choose one, it’s never welfare benefits that have gotten short shrift.
Republicans almost never touch the welfare state third rail because that way lies political annihilation. Maybe when they start racking up big enough majorities to enact constitutional amendments that hem in welfare spending.
Otherwise, only economic disaster can force through the hard decisions that Argentina’s Milei is making on behalf of his electorate. But if Argentina’s economy were less sclerotic, less regulated, he wouldn’t need to be making these decisions.
That’s the American economy’s secret sauce. Anyone with any background, from anywhere in the world, can start a business and grow it into a serious contender. Andy Grove, Hungarian Jewish refugee (Intel) and Min Kao, Taiwanese grad student (Garmin GPS) are just two of the more obscure founder CEOs. Willis Carrier (Carrier Corp), inventor of A/C and the Wright brothers (Wright Company) inventor of manned flight, are earlier examples of a long tradition of inventiveness, protected from government regulators and thievery by big corporations, that have kept the US at the top of the heap. The outsized benefits from being at the frontier of technology and other goods and services keep revenues flowing, so expenses are less of a concern.
Hi Zhang,
Thx for taking the time.
You make a very interesting point.
I think it was maybe Stalin that coined American Exceptionalism.
But they’re not catching up this time w/o inflation, spending freezes and tax hikes.
The ingredients are under attack. Creativity and imagination is being replaced by uniformity and conformity. Liberty is under assault, access to capital is still vast but can’t last.
It will be interesting to see what happens but I know that we can count on the global ineptitude.
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