The U.S. dollar is again hitting record highs, and it is much stronger than it was even a few months ago when I last blogged about it: Why a Strong U.S. Dollar Is Terrifying!
My favorite way to gauge the dollar’s strength is by watching the DXY Index. The chart at the bottom of this blog indicates that the index is about 114 (while I am typing this blog this morning) – about 6 points higher than where it was in July when I last blogged about this, and higher than it has been in 20 years!
Twitter is exploding in panic over this because many market watchers recognize the risks.
And, I just got this NY Times article in my newsfeed as well: Dollar Is Strong…Good For The U.S. But Bad For The World.
The author of the article points out the usual reasons for the rising dollar: (1) higher rates in the U.S. attract more investors and thus more demand for the dollar; and (2) when the rest of the world is on even shakier ground economically, the U.S. still represents a safe haven for investors (and thus even more demand for U.S. assets and/or dollars).
She misses a point though that Jeff Snider makes over and over: Because dollars are mostly created by banks lending money and because banks are not lending money right now, there is a massive dollar shortage across the world (and that shortage is what is pushing up the value more than anything else).
The author also points out why a strong dollar is bad for the rest of the world: much of the world’s debt and trade is denominated in dollars, so other countries have to pay through the nose to convert their currencies to dollars in order to buy stuff (like oil) or to pay off debt. This makes their inflation much worse and also puts entire countries on the verge of literal bankruptcy.
The strong dollar is good for the U.S. because it makes goods we import cheaper and will help fight off inflation.
It is clearly NOT ALL good though for the U.S. though and that is why Twitter is “freaking out.”
First of all, a strong dollar makes our exports much more expensive and puts America’s exporting companies (Exxon, Apple, Ford, Chevron, P&G, and Cisco, to name a few) at risk.
And, more importantly, if the dollar gets too strong, it will put pressure on too many other countries and push them into debt and currency crises that could end up severely damaging or even freezing the world economy for a period.
If major economies can’t afford to get enough dollars to pay debts and/or import necessary goods, investors en masse could flee from those countries and put the entire world financial system (on which the U.S. depends too) on edge.
Some of the Twitterati are also speculating that such crises could push rates up temporarily too in the U.S. – if countries (like China or Japan) start to dump U.S. Treasuries to raise cash to buy more dollars.
In any case, let’s hope the powers that be know how to deal with this so they can prevent an actual catastrophe.
Given, however, that we have never been in this situation before with this much inflation and debt in the world – I think it is unlikely that anyone knows what to do or how this will actually play out.
Finally – I recommend re-reading my blog I reference at the top of this blog (for more details), and also re-watching the famous Dollar Milkshake video where Brent Johnson’s equally famous theory about what is taking place right now is explained in 6 minutes (or 3 minutes at 2x speed).
DXY U.S. DOLLAR INDEX AS OF 9:55 AM, 9/26/2022
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