The US dollar is on track for its worst year in modern history
semafor.com
semafor.com
Historically, the euro has generally been a good bit more valuable than the dollar. But in 2022, the dollar was more valuable than the euro at a point. Recently it's been bouncing around at nearly 1 euro=1 dollar.
Then there's the yen. Used to bounce around between 1 dollar = 100~110 yen. Recently reached 1 dollar = 162 yen.
The dollar losing its value is a return to the pre-covid norm. Lots of countries pumped money into the US to make money off skyrocketing stocks and high interest rates, and now they're pulling it back into their countries. It's a high that can't last forever. And if it did last forever, that would not be good for the world as a whole since it would mean every country is supporting the US at the cost of devaluing themselves.
Even I wasn't paying attention for a few days (just flew to Canada from Europe).
So my theory of profit taking seems right, back to fresh highs.
It still has 10% to go to surpass its previous peak if measured in euros. Which is kind of the point.
Currency depreciation is usually good for the local stock market, that’s not too surprising.
Since Trump’s inauguration even the STOXX 600 managed to outperform the S&P 500 which is something that almost never happened.
That's an odd way of saying the US doubled it's federal budget from $3T to $6T in response to COVID and has now ensconced this pork further into law. Under a "republican" administration, no less.
> The dollar losing its value is a return to the pre-covid norm.
Which is to say that even $3T contained an unjustified amount of debt spending just not as obscene as it is today.
> It's a high that can't last forever.
That's the "big beautiful bill" for ya.
Are you under the impression that this is surprising? Republicans are consistently the ones spending more when they are in power. It's time to dispel this myth that they are fiscally "conservative", they have presented more unbalanced/defficitary budgets than Democrats and the latter in recent memories are the only ones who managed to present budget with surpluses, under Clinton.
But indeed, the dems are controlled opposition at this point. Most of them oppose progressive ideas, at least as much than the republicans.
Both sides of the gerontocracy are happy to improve their lives while not planting seeds for the future.
That's what inflation does.
People are routinely taught that inflation is the “decline of value of money”, but that's not the reality. Inflation is just the increase in consumer price, which is perceived as a decline in the relative value of the money, but its absolute value on foreign markets isn't (directly) affected by inflation.
And when the Central bank raise the interest rate to cool the economy down and temper inflation, then the absolute value of the money rises (because the higher the interest rates, the pricier the currency on the FX market). This increase in the currency value in turn also helps fighting inflation because it lowers the cost of imported goods.
So, indirectly, because of the central bank's reaction, inflation is actually increasing the absolute value of money, and this is what we saw in 2022 when the Fed raised the interest rates 9 month or so before the ECB start doing the same (because the inflation came in advance for the US compared to EU).
That's what they want as export based economies.
A balance is necessary, and things have been off balance recently.
My guess is that he wants to make it more attractive when it comes time to refinance the large portion of American long-term debt. He also wants to keep the interest rates low for the same reason.
My questions is: What is causing the actual slide? The concrete mechanics and motivations that are causing people to sell USD.
It has the side effect of boosting nominal investment value (even if real value stays flat or decreases), maintaining political support from people who can't do math. The numbers continue to look good, but outcomes worsen.
There are two flies in this ointment: international capital response and inflation.
The latter is why Trump has been spending political capital on demonizing the Fed and Powell. The house of cards collapses if actual inflation bites and reveals the game.
As to the former, it's tough to look at the situation and see US debt / equities as attractive as they once were:
1. Unsustainable US budget deficits
2. Political threats against the US central bank
3. Tariffs
4. Decreased immigration and worsening demographics
1. https://www.tradingview.com/symbols/TVC-DXY/?timeframe=60M
But I'm no economist and don't know what these numbers mean or what the consequences are.
Yet the Euro increased by > 10% despite the ECB cutting the rates quite significantly. Imagine how low the dollar would go if the Fed listened to Trump and cut to 1%..
It will be reflected in overall inflation statistics, and that limits the Fed’s ability to cut rates.
Only insofar as it remains sort of independent. Trump has ranted several times already about taking control of the thing and forcefully cutting rates.
A vote for Trump, as it turns out, was a vote to increase US national debt by double what anyone increased it by before (which was also Trump, so anyone saying they "didn't see this coming" ...)
Since the beginning, conservatives gravitate towards more... alternative... history. I know I was taught about the War of Northern Aggression in schools. Their issue with public education isn't per se the "education" part, but the "public" part. Unfortunately, an attack on public education is an attack on education itself. We all understand that less public education means less education on average.
I quiet enjoy living in a country with literacy rates in the high 90s, and I'd like it to stay that way.
Contrary to what xkcd or NYT might tell you, actual economic institutions like the IMF and the World Bank are coigzant of the issues caused by the status quo and largely view the Trumpian diagnosis, if not the horrid execution, as correct.
The US sells billions of dollars of digital services to the rest of the world each year. Did Trump and co include netflix, aws, azure, etc etc in their "unbalanced trade"?
Total bilateral trade in goods between the EU and the US reached €851 billion in 2023. The EU exported €503 billion of goods to the US market, while importing €347 billion; this resulted in a goods trade surplus of €157 billion for the EU.
Total bilateral trade in services between the EU and the US was worth €746 billion in 2023. The EU exported €319 billion of services to the US, while importing €427 billion from the US; this resulted in a services trade deficit of €109 billion for the EU.
source: https://policy.trade.ec.europa.eu/eu-trade-relationships-cou...
The matter of fact is that nearly every major economy is running a surplus, it is really on the USA and some countries like UK that is holding up the deficit side. Whether you think this arrangement is good or not is a matter of debate, but many economists would agree it's not good or sustainable, nor should it be occurring in the first place. Surplus countries should have strengthening currencies, deficit countries weakening ones under natural conditions. This is not happening due to very specific policies that surplus nations have imposed, at the burden of deficit nations.
No central bankers in the world ever said that including Powell. That’s Trump policy and Trump only.
https://www.federalreserve.gov/boarddocs/speeches/2005/20050...
They have actually, the debate about persistent imbalances have been going on since the 2000s and Bessnet's arguments are simply the extension of Bernanke's prior hypotheses and ultimately Keynes diagnosis on global macroeconomics stability.
The first one throws an intentionally vague imbalance and aims squarely at Chine state aids distortion. It also goes at length about how tariffs are seen as terrible by everyone and how it’s all about a level playing field and not about rebalancing trade balances.
The second is strictly about the US and explains that trade inbalance has more to do with capital flows that actual trade of goods and how the extreme situation in the US might need moderation. Its conclusion is that the trade balance will fix itself if the US both fixes its budget issues and help foreign countries to actually use their excess savings locally. That’s pretty far from thinking the balance of trade needs to be rebalanced.
They are all talking about the same thing. The large imbalances in trade are precisely due to the distortionary domestic policies that surplus nations bring, of which China is commonly perceived as the biggest violator. A world without any protectionist policies is one where trade balances are temporary or close to 0 due to FX effects.
>The second is strictly about the US and explains that trade inbalance has more to do with capital flows that actual trade of goods and how the extreme situation in the US might need moderation.
You clearly then need to review your definitions because we are talking about the same concepts here. Current Account + Financial & Capital Account = 0. The capital flows are the direct inverse of the current account and flow of trade. In the same way, Current Account = Savings - Investment. When he talks about using excess savings locally, that is precisely about moving savings into consumtpion and thus reducing trade surpluses.
That is very much what economists or Bessnet are still saying today in reducing excessive surpluses in turn and thus trade imbalances. Clearly after 20 years, trade imbalances aren't self-balancing like FX effects would imply, due to very explicit policies pursed by said surplus nations in doubling down on manufacturing rather than increasing consumption.
Mind you, the greater implication of what Bernanke was suggesting is that the excess savings and associated large capital inflows (and thus deficit) is what fueled the housing bubble and credit expansion in the 2000s that led to the GFC. The greater argument being that these distortionary policies that being pursued domestically in surplus countries over manufacturing is leading to an associated distortion in the US economy towards overfinancialization.
https://www.brookings.edu/articles/rebalancing-the-world-eco...
It's better to say that rebalancing is a painful affair. But account balances should be naturally self-balancing in the first place, the imbalance today is the result of policies that the surplus nations, China foremost, is unwilling to abandon easily. If they all opened up their capital markets, currency controls and removed subsidies and tariffs, if they seriously committed themselves to free trade the problem would solve itself in time. And most economists would agree with me on that.
But if they are unwilling to do that, and the last 20 years of negotiation have been fruitless, then unfortunately America may need to resort to unilateral actions to resolve it themselves. And if you run the simulations, America will win that fight for escalation. It will hurt for us all, but inflation is nothing compared to the mass unemployment surplus nations will suffer.
I don't paticularly agree with Trump's methods or his flip-flop execution in attempting to resolve the problem, but it is a problem that many would agree needs to be resolved. China, Europe all themselves have agreed now that they need to raise consumption instead of doubling down on manufacturing, and that's very much convergent with what the Administration seeks to achieve overall.
Mind you, I'm not saying whether trying to rebalance is smart or dumb. I'm just saying that the imbalance causes us problems too.
Always check both local currency and USD returns when evaluating international markets.
But the euro itself has climbed ~10% YTD vs the dollar (≈ $1.02 → $1.12-1.18). So you get an ~18% gain if you invest in MSCI Europe in dollars.
Europe hasn't "beaten" US stocks because its companies suddenly out-executed; most of the gap is the stronger euro.
Not that it matters who’s "winning." My gripe is with US headlines that shout "Japan stocks are on fire" or "Europe stocks are on fire," when what’s really happening is that global markets are rising together and currency swings make one region look better than another.
1. You exchange Dollars for Euros
2. You buy a stock in Euros
3. You hold the stock in Euros for a period of time
4. You sell the stock in Euros
5. You exchange your Euros for Dollars.
The difference in the exchange rate in step 1 and 5 can have a very large impact on your total return, often times a larger impact than step 3.
But I think any weakness is temporary. With a stable government and abundant natural resources that will be even more sought-after in an AI-driven world and largely insulated from automation Australia’s long-term prospects look strong.
Wow this is the case in most of the Europe too, what a coincidence. Fancy investing in our premium real estate?
and a USD denominated one: https://finance.yahoo.com/quote/SPY/
Have a look at the 1 year view. Note the fairly dramatic difference.
Here's how the US Dollar Index has performed over the last ~30 years. The swing looks pretty typical to me. If it drops another 10% (as the article says Morgan Stanley thinks it might) then I could see this event as an outlier. For now, I find it interesting but not especially concerning. There's pros and cons to having stronger/weaker currency. I think it's probably worse to have a volatile currency than an especially strong or weak one?
I take it that the "on track" is determined by extending a current downtrend as if it will continue precisely the same, for the next 6 months, which seems unlikely.
I get that with the recent passage of this US bill, people want to pile on. I can assure you, that Canadians have no love of the current administration. But this is another click-baitish thing being done to us all, feeding on people's upset, the time of year it is, the US holiday, and more.
Ah well.
These are anecdotes, but I don't see how all of that new money would not have contribute to price inflation, but with a delay because the immediate velocity of money was low. If you want to point me to some of the graphs you're thinking I'll certainly give them a look with an open mind, but denying that fundamental dynamic feels close to the opposing propaganda that's always maintaining that monetary inflation has no bearing on price inflation.
It's hard to draw firm conclusions because pandemic inflation is fundamentally different than ordinary inflation. Still, even though the supply side of things was unusual (caused by product shortages due to COVID), we still wouldn't have had any inflation if we'd skipped the stimulus entirely and allowed incomes and consumption to decline. It was our determination to keep people whole that produced stable consumption desires in the face of product shortages, leading to inflationary pressure.
My guess is that a stimulus sufficient to address a recession is almost always going to produce some unwanted inflation. We just don't have the capability to fine tune things precisely enough to avoid it, and it's better to err on the side of maintaining growth even if that risks more inflation than we'd like. I like the tradeoff we made for COVID (strong growth, too much inflation) way more than the tradeoff we made for the Great Recession (slow growth, normal inflation).
Just because a group of people approve of things happening doesn't make it a good year. My estranged family does and they don't have a grasp on the notion of cause and effect nor do they have an acceptable level of reading comprehension- I do not value their opinion in the slightest l.
Still extremely high by global standards considering everything.
e.g. Hollande in France was at less than -80% not that many years ago.
The US isn't self sufficient in food. Food imports are going to get more expensive.
Countries may be unwilling to trade with an increasingly belligerent US that slaps everyone with tariffs. In fact, many will just slap the US with tariffs and other barriers of their own.
No major US export sector operates exclusively as an exporter without any exposure to imports or global supply chains. Even the largest US exporting industries (oil and gas extraction, civilian aircraft and parts, and pharmaceuticals) rely in varying degrees on imported inputs, components, or capital equipment... which companies are you talking about?
Ironic the side that likes to joke about the lack of choice in certain foreign supermarkets is going to create those conditions here at home.
The world doesn't need that much guns and missiles. There are two major markets currently and that's all mostly.
You may be tempted to assume that only active participants in wars buy weapons, but that has never been the case. And especially now, you have many countries trying to restock and prepare.
Yet they seem to be begging for them pretty hard.
People who bought the F35 have mixed views. Awesome tech. Is there a remote off switch?
British arms factories are salivating at the prospect of NATO and EU spend. The French want to ring-fence them out but almost any complex materiel is made across Europe in the wider sense. Risk management drove there, I think France will stop being silly once their factories supply books are healthy.
American socia media takes care that they are all engaged, quarrelsome, and polarized.
Ask yourself, did you panic during these years? Mostly no. These were pretty good years.
Meanwhile the CCP hasn’t unpegged their currency while they are experiencing deflationary price declines.
Yikes
It’s just that countries don’t admit when they are devaluing currency, because devaluing currency could cause a loss in market confidence, devaluing it could cause a tit for tat currency war, or it could result in speculative attacks against the currency.
But just to emphasize my point, the dollars decline is intentional.
I'm afraid we're to live in very interesting times real soon.
Not sure what to keep my retirement fund in if not those though :c
Just look how great the Turkish stock market did since 2020. ~14x increase (in local currency)
Aging population and a significant decrease in per capita productivity. Well that’s not great for anyone..
Also significantly increasing economic and financial stability (compared to the days of the gold standard with its permanent boom and bust cycles)
A good example I heard today was this. Imagine if you have a legit money printer. Show me the most pure human and eventually they will hit that button and print new money. That's what we've been doing for a long time now to finance all the wars and bailouts.
https://fred.stlouisfed.org/series/M2SL
A good book: https://www.lynalden.com/broken-money/
They were extremely cheap, though? Even in richer Western European countries..
Economists: No, no, no, no...
The People: Genius! Genius! Let's vote him!
CHIPS act goes away, something else comes, trade deals are made, then tariffs, then no tariffs, then tariffs again.
You don’t offset a cheaper dollar against counter tariffs.
You’re one nationalization away from becoming the next Argentina.
Good luck getting loans & investments for your 100% American business ideas.
Hint: Go to any country that is not called the USA and try to get a $1M equivalent loan/investment for your startup and let us know how it goes.
Maybe crypto will eventually be useful for trade?