by MN Gordon, All News Pipeline:
Dollar Strength
Amidst a backdrop of raging consumer price inflation something strange and unexpected is going on. The U.S. dollar has become more valuable. Not against goods and services. But against foreign currencies.
For example, the U.S. dollar index, which is a measure of the value of the dollar relative to a basket of foreign currencies, recently crossed the 105 level. This marks its highest level since December 2002. Not since tech stocks were in full meltdown in 2002 has the dollar been so strong.
Without questions, the dollar’s had quite a run. The dollar index increased over 6 percent in 2021. So far in 2022, it has already gained over 7 percent. And, for the time being, and despite shortsighted dollar weaponization policies, the dollar is preserving its reserve currency status.
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This week, the dollar index did retreat slightly…at market close Thursday (May 19) it stood at 102.91. Maybe the dollar has peaked. Or maybe this is just a period of consolidation before its springs upward.
From a historical perspective the dollar could go much, much higher. In the mid-1980s, for instance, the dollar index hit 164. Of course, the world was much different back then. The euro didn’t even exist.
From our perspective, it seems unlikely the dollar index could hit its old high from nearly 40 years ago. But it does seem likely the dollar could hit parity with the euro for the first time in 20 years.
Slow growth and high inflation in Europe could continue to be a drag on the euro. In addition, the Russia-Ukraine war, and the resulting supply chain disruptions to natural gas imports in Europe, points to a weaker euro ahead.
So what are we left with?
Somehow, with all its faults and foibles, the dollar is perceived to be an interim safe haven asset. Somehow, with its 75 basis points in rate hikes this year, the Federal Reserve is perceived as being hawkish on inflation. Somehow the dollar, and dollar based investments, have become attractive to foreign investors.
What’s going on…
Insufficient Explanation
You’ve likely heard the well-worn metaphors. The dollar’s the cleanest shirt in the dirty laundry basket of fiat money. The dollar’s the best house in a bad neighborhood.
Does this really explain what’s going on?
Maybe. At least for now, it offers a partial and insufficient explanation.
As noted above, the euro is haggard. But it’s not just the euro…
In Japan, the situation is quite different. Inflation is just 1.2 percent – compared to 8.3 percent in the U.S. Following the simultaneous meltdown of the Japanese NIKKEI and the Japanese real estate market in 1989 the Bank of Japan (BOJ) has tried just about everything to compel inflation higher.
The BOJ has tried policies of unlimited bond buying. It has also pumped massive amounts of printing press money into Japanese stocks via exchange traded funds. It has splattered the countryside with concrete under the guise of public works spending.
For its efforts, the central bank has driven Japan’s debt to GDP ratio to over 250 percent. Still, inflation has remained elusive. Thus since the BOJ wants higher inflation, and is unlikely to hike interest rates like its cohorts at the Fed, the Japanese yen is staying comparatively weak against the dollar.
That’s the popular story, at least. The rationale, no doubt, is rather suspect.
At the same time, Beijing’s control freak zero-COVID policies have transformed the Chinese yuan into panda turds. For these reasons, and many more, the U.S. dollar is in high demand.
The whole thing seems rather farcical. On a relative basis the dollar may be strong. But it’s still doomed…just like all fiat currencies.
So, what’s up with gold?
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