Sunday, June 10, 2018

Rising US Dollar: What Explains "Special FX?"

Judging by the number of housing bust sites on my blogroll, you're probably aware that I am one of the many who are down on America's near-term prospects. From such a POV, the United States and its currency should be getting walloped as its macroeconomic picture gets even worse than it is now. Thus, I have been somewhat befuddled by the unexpectedly quick rise of the US dollar against many other world currencies, especially the euro. As late as July 15, the euro was trading above $1.60. Today, however, the US dollar has somehow managed to push the common currency to below $1.39. The moves have been, in a word, dramatic.

Those who are arguing that the dollar was due to strengthen sooner or later raise a number of points. First, the dollar was oversold and due for a correction. (Fair enough.) Second, bad economic news from elsewhere demonstrates that other economies will be affected by the global economic slowdown as much as the US has. On a related note, commodity prices have begun to ease as demand for commodities wanes in the rest of the world. After all, since the US constitutes a final destination for many of the others' wares, a slowdown in the US would affect them as well. Importantly, commodity prices have shown much inverse correlation as of late with the dollar, most famously oil. Third, America's woes have already been "priced in." Fourth, risk aversion in the wake of the subprime mess means investors are once again avoiding foreign markets and repatriating their funds from abroad and changing them into dollars.

OTOH, I am far less sanguine about the above explanations. While they hold to some extent, it seems to me that things are getting even worse Stateside. Indeed, I find it remarkable that a string of bad news has not dented the dollar's recent ascent. These include:

- The trade figures for America have been worsening as of late; moreover, a stronger dollar is only bound to lessen the trade competitiveness of American exports;
- Aside from a once-again ballooning trade deficit, the US budget deficit is soaring up, up, and away. The deficit is set to surpass $400 billion in fiscal year 2008, with worse expected in 2009.

Plus, don't get me into a Roubini-esque laundry list of what ails the US. I ask you: is America the very picture of a "healthy" economy? What we have here is yet another case of what I call "special FX": currency moves seemingly devoid of logic or semblance to economic reality. From my point of view, a buying opportunity to switch out of dollars is close at hand given that America's woes are not going away anytime soon. Plus, I will soon post on why it is unlikely that either Obama or McCain are going to improve America's record of fiscal debauchery. In the meantime, enjoy the special FX.

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