The Federal Reserve is set to cut interest rates again on December 11th. Conventional wisdom tells everybody that the dollar will continue to fall as a result of easy money, ignited inflation, etc. Well, it may fall for the first day, first week or first month, but the dollar is near a bottom.
I base this statement on the current state of the global economy. The US Federal Reserve is not the only Central Bank in the World considering a rate cut. The Fed is considering a cut because of fears that the US economy is heading into a recession. While I don't see signs of a recession, a slowdown is definitely in the cards.
So the question becomes what happens to the global economy if the US economy slows significantly? In the past, it meant that if the US economy had a cough, then the rest of the world probably would get a major cold. There are some that are saying that this rule has changed because of the emergence of the developing world and BRIC. While I agree that other economies have expanded impressively, I am not yet ready to buy into the notion that the change has been significant enough to change my way of thinking. If the US economy falls into recession and the global economy slows, then the world's wealth will seek a safe haven and that is currently the US Dollar and US Treasuries.
So we have a conflicting trend. The dollar falls when the Fed eases. It rises during geopolitical events or global economic stress. The following chart details the dollar against major currencies over the last 13 years. The chart also show the inverse relationship between the dollar and gold (1/price of gold is shown on this chart):
A contrarian view is also worth considering here. Every trader in the world is long of gold because of the global demand for the commodity. Every trader in the world is short of the dollar because the Fed is going to cut rates. Hmmn...notice a pattern?
If the global economy slows, what do you think will happen to the price of gold? Demand for gold will decrease and the price of gold will decrease pulling up the dollar.
So you have every trader on one side of the bet that the dollar will fall and gold will rise. You have the possibility that the Fed will ease, but the ease is based on the fear of a US slowdown that will probably lead to a global slowdown that tends to cause global investors to seek safe haven in the dollar and treasuries.
One last piece of the puzzle and it is longer term. The Fed ease will stimulate the economy 12-18 months from now. History has shown that the dollar is strongest when the economy is growing. Growth pulls up the dollar. This last piece confirms for me that the dollar will be higher than where it is a year from now.
So I am not worried about the dollar at ALL.
This short post is very simplistic. There are other economic reasons at play, but the basic premise is that the dollar has bottomed or will shortly.
Of course, I encourage comments.
4 comments:
Sneak,
My biz is still building steam like should have happened this summer. Could my biz be an indicator of what the future holds?
If you will remember I moaned bad in Jan. and Feb. telling everyone things just weren't right because my type of freight was so sloooow. Maybe we can use my little crystal ball as an indicator but we need to remember it preceeds the 'Fed news' by 8 to 9 months.
My crystal ball has indeed worked well lately, I just need to install a clock in it. my timing has been so bad here of late its a wonder my engine runs. (see ROCM, MTL, SOLF) Easy six figure profits to be had in a 60 day period and I turned it into a six figure loss with bad timing.. go figure.
Hi Denis:
Thanks for the comment. Yes, transportation is definitely a leading indicator and the fact that your business is picking up is something that we all need to pay attention to. I am sure that you are considering the holiday traffic (seasonal variation) when you mention that business is improving.
My crytal ball sees no recession. Growth on the horizon with the Fed providing a tailwind. No real inflation fears either.
Interesting chart of the dollar - I was looking at this a few weeks ago. Some scary similarities to the drop we've seen compared to the one that preceeded the stock market crash in '87.
Hi Mike:
Thanks for commenting. I need to go back and study 1987. I wasn't following the dollar back then and I really don't know what caused that huge decline prior to the Crash. Worth researching.
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