The dollar’s ‘illogical’ move actually makes sense, making the next move predictable
TThe Euro / Dollar (EUR / USD) is at its lowest level in months (a weaker EUR / USD means a weaker Euro and therefore a stronger Dollar). There is nothing too remarkable about the descent; it has not been particularly steep or spectacular in terms of the often volatile forex market. We are back to the low of a few weeks ago and so far we have not broken it. Yet the decline over the past two months has been dramatic, and what’s fascinating is that it happens when it does. Now is a time when basic market theory seems to suggest that the dollar should fall; after all, inflation is becoming a problem in the United States
PPI, RPI, retail sales, consumer durables, even Friday’s jobs report: name it, the numbers show inflationary pressure on all fronts. This should logically mean a fall in the dollar. We tend to think of inflation as a rise in prices, but if you think about it, it could just as easily be expressed as a fall in the dollar relative to everything else. If an apple costs one dollar before inflation and then two dollars after, the apple’s “price” has increased, but the purchasing power of the dollar has decreased. The same dollar bill that used to be worth an apple is now worth half an apple.
So if inflation is coming, or is already there, why is the dollar gaining ground? As is always the case in the markets, even this seemingly illogical move actually makes enough sense if you dig a little deeper.
Forex, like all markets, is both comparative and forward-looking in nature. Comparatively, yes America is eyeing inflation in the eye, but so are everyone. The question then becomes how, and especially when, the Fed will respond to this pressure from other monetary authorities around the world. This move tells us that the market expects the Fed to pull back fairly quickly and signals an expected rate hike sooner.
They may be forced to do just that, because even if inflation sets in, Congress is still trying to cut deficit spending to get out of last year’s recession. The infrastructure bill is necessary, of course, and one can even argue for the subsequent “human infrastructure” bill, but spending is always inflationary, no matter how well-intentioned or how well-intentioned it is. required. This is all the more true since there is absolutely no chance that significant tax increases will pay them off. Given the Republicans ‘love affair with Grover Norquist and the Democrats’ determination to live up to their deserved reputation as a “tax and spend” party, the creation of a coalition of politicians willing to vote for tax hikes is virtually impossible these days, hence the national debt of $ 28.62 trillion and growing.
This puts additional pressure on Jay Powell and his merry gang to change course as soon as possible because once again, this time in reverse of what happened in 2007/8, fiscal policy is clearly unfavorable. to the monetary authorities.
These congressional actions and their impact also explain why this movement is destined to end before long. The political situation makes it extremely likely that whatever the Fed does, and every time it does, America will be hit harder than most by inflation. The dollar will lose its intrinsic value and will have to fall.
The strength of the dollar in recent months, and the return to weakness last week, makes little sense on the face of it in an inflationary environment. However, under the circumstances and compared to other currencies, this makes perfect sense. However, these same factors also point to a reversal shortly, so over the next few days I will be taking a few trades such as long crude and other commodities that will pay off when that happens.
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