Here we are on Thursday and the market, so far, is behaving as expected this week. Well, to clarify, it is behaving as I expected it to behave, a bit up, a bit less down. Although yesterday’s up was just a tad over the top, you know, with all excitement about the Repubs taking over the US Senate.
In any case, there is something out there that is making the headlines and one should be watching it, although I do believe it will settle down here in a bit. It is one of those double-edged sword things, you know, sharp on both sides so it can cut two ways. In my own convoluted way, I am talking about the rapid rise of the US dollar.
- The recent rise in the dollar’s value is ultimately a bet that the U.S. economy is going to keep growing somewhere close to the 3.5% GDP growth rate we saw for last quarter. It’s also a bet that U.S. corporations will actually be able to grow their bottom lines by the expected low-teens growth rates they’re currently expected to put up for the coming four quarters.
Yes, the rise in the US dollar signifies that investors believe the USA is on the right track economically and that US corporations will continue to book increasing profits, and that is one edge. Mind you, much of what happens in the market is about confidence and the rise in the US dollar shows confidence.
The other edge, and one that could cut sharply, is the fact that the US dollar is the preeminent currency in the world and much of the trade that goes around the world is either traded in US dollars or the value of a country’s currency is pegged to the US dollar.
Consequently, a rise in the US dollar makes the cost of goods “Made in America” more expensive, which could cut into the record exporting the US has been doing in the last couple of years. Additionally, and perhaps more ominously, a big rise in the US dollar draws precious capital away from weaker economies, thus, straining their ability to get stronger and to buy American-made goods.
The good news right now is that the US dollar is trading below its long-term average, even though it has gained some 7% recently. The latter fact is important to note, as the markets have a funny way (funny, really?) of dealing with hubris, you know, excessive pride, or in this case, excessive betting.
- The recent dollar bulls made a huge bet based on faith, and one stumble could reverse that bet in a hurry. In the meantime, strong economy or not, the dollar’s overbought and due for at least some sort of corrective lull.
Yes, bring that US dollar back to reality, or, in this case as well, back to a Fed-run world reality. For now, given interest rates and low inflation, the US dollar is just a bit above where it should be, but in no way is it in dangerous territory, yet.
One more thing, as I talk about the rising US dollar and that is a sinking gold market.
- The suggested explanations for gold’s implosion were numerous, but there’s no doubt in my mind the vast majority of gold’s recent meltdown is linked to nothing but the U.S. dollar’s red-hot rally.
The above makes sense in that gold is a fear trade, for the most part, so, a rising US dollar signifies confidence in the US economy and confidence that a productive US economy will, in turn, give momentum to the market. Thus, money flows out of gold and into the market in all areas, thus assisting in creating a broad-based upward trend.
Now, maybe the perception of the Repubs actually having any power to create US energy policy is enough to make some of that money flow into the aggrieved energy sector.
Ok, so it is not happening today as the XLE (energy index) is down, but it could happen, right?
Trade in the day; invest in your life …
