Dollar Strength Continues - Against All Odds

February 26, 2020

Trump-bashing appears “in vogue” in most parts of the world – and certainly in the U.S. Democrat constituencies and mainstream press. However, whether you like the man’s hairdo or not, some of the factual economic statistics produced during this administration can be considered impressive, or at least promising.

 

I don’t think euphoria is justified – not yet. After all, America – and the global economy, for that matter – still has a wide and deep array of issues to deal with. Turning the U.S. economy around in a sustainable manner, after all the damage that has been done with decades of cheap money policies and growing debt, is by no means a trivial matter. The problems are immense.

 

For one, America’s debt has not shrunk one bit. At the same time, the increasingly aggressive political “war of words”, and possibly a deeper cultural war of conservative values versus increasingly socialist (if not communist) ideals, appear to stifle the kind of positive change and solution-oriented progress that might be possible otherwise.

 

Finally, we also appear to be coming to the end of a very long credit and business cycle. Granted, some experts and commentators may disagree at least on this last point. When the U.S. Federal Reserve cut interest rates last July, Fed Chairman Powell stated: “We’re thinking of it essentially as a mid-cycle adjustment to policy.” While I don’t want to read too much into the words of Mr. Powell, the fact that he described this stage of the economy as “mid-cycle” is remarkable, to say the least.

 

As we all know, we are currently in the longest economic expansion – and stock market boom – in U.S. history. If this is “mid-cycle”, this would mean that we have another booming decade ahead of us, doubling that record expansion. I therefore consider that statement overly optimistic, if not plain dishonest.

 

Irrespectively of the above, the U.S. currency and gold have had a strong start into 2020. For gold investors, this is great news, as when the dollar AND gold rise, it speaks volumes about the strength of the precious metal.

 

The U.S. dollar has seen the strongest start into a year since 2015, which largely defies the forecasts and warnings of most experts. The Bloomberg dollar index rose 1.9% since the end of December 2019. The greenback is up against all of its Group-of-10 peers in 2020, benefitting from relatively strong U.S. economic data and bond yields that remain high relative to the rest of the world, even as interest rates slide.

 

While the dollar’s strength may actually add headwinds to the global economy, the U.S. economic figures– without going into more detail here – are generally positive: Unemployment numbers, the GDP growth rate, and also investor sentiment gauges all look surprisingly positive, especially considering the onslaught of negativity found in the media.

 

 Source: Bloomberg

 

The euro, meanwhile, has weakened against the dollar. Contrary to America, data shows industrial production in the common currency region shrinking and the German economy flatlining. The weak outlook will stifle the European Central Bank’s ability to raise rates, which again will be in support of the dollar.

 

Overall, the Fed’s easing has only opened the door to other central banks to continue and possibly double down on their expansionary policies. The U.S. Federal Reserve will continue to struggle with lifting rates. As the global economy and the U.S. economy disappoint in the coming months, the Fed, in sync with other major central banks, will continue to ease even more. And so, the cheap money carousel will go on, and on, and on…

 

Do you know that joke about the two guys camping out somewhere in Africa? They are sitting by the fire, when a lion, one that looks somewhat hungry, appears. One of the two men quickly starts putting on his shoes. The other asks him: “You don’t think you can outrun that lion, do you?”, to which he answers: “No, I don’t. But I can outrun you with my shoes on…!”

 

The dollar appears to be the guy with the shoes on… It is holding up very well in this “game of relative strength”. As long as other regions and their currencies are relatively weaker, and as long as relatively positive U.S. economic numbers are produced, we may well continue to see a relatively strong dollar. And, as the overall economic uncertainties and fundamental economic problems persist, you may well see gold continue to rise as well.

 

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