Why the strong US dollar trend may persist | Charts that Count

There’s a big debate
raging across Wall Street about the future
of the US dollar. Is it finally set to
weaken versus its peers? Or will it continue to
strengthen in the coming year? Here’s a chart of the US
trade-weighted dollar. Now this tracks the dollar’s
value versus the currency of major US trading partners. As you can see here, it has
strengthened considerably versus its peers since
the beginning of 2018. And it now sits at its highest
level in about two decades. It’s a surprising move
for a few reasons. And the trend looks
set to continue, much to the chagrin of
President Donald Trump, who has consistently railed
against the economic impact of a strong US dollar. Now the first reason has to
do with the Federal Reserve. So, a big component as to why
the dollar strengthened so much versus its peers in 2018
has to do with the fact that the Federal Reserve
was raising interest rates, while other central banks
around the rest of the world were keeping their
already low rates low, or moving them even
lower than that level. What changed was
in January, when the Fed made a sharp
U-turn in the path of its monetary policy. Six weeks prior we
had raised rates for the fourth time in 2018. And in January it
said it was actually going to consider cutting
interest rates in the face of softening US economic data. And in July, it instituted the
first of three 25 basis point cuts to its benchmark
policy rate. It moved in July. It moved once
again in September. And then it moved
once again in October. The only effect the Fed’s
U-turn had on the dollar was for it to strengthen
versus its peers. And this was because the likes
of the European Central Bank, the Bank of Japan, were rolling
out very aggressive stimulus packages and cutting
interest rates. And so that interest
rate differential that helped to explain the
strengthening of the US dollar versus its peers during
2018 persisted well into 2019. And it looks like it’s set
to persist again in 2020, given the fact that
the Fed has recently said that it’s going to put a
stop to any additional easing for the time being until it
sees bigger deterioration in the economic data. And now that brings us
to our second reason. Relative economic growth. Back in 2017, President
Trump unveiled a series of tax cuts aimed at
turbocharging the US expansion. That helped to buoy the
dollar to some degree, but economists warned that
the effects of those tax cuts would be short-lived, helping
to build the case for a weaker dollar. But that hasn’t happened, as
you can see in this chart, given the fact that growth
around the rest of the world was pretty lacklustre at best. In China, for instance,
the growth rate slowed dramatically, despite a
series of stimulus measures put in place over recent months. And in Europe’s largest
economy, Germany, it was on the
brink of recession. And so, when you had
US growth outpacing that of the rest
of the world, it helps to shore up the dollar
versus those other currencies. And then there’s the
ongoing US-China trade war. The US dollar plays
a very important role in the global financial system. It serves as a safe haven
asset for investors who flock to it during times of turmoil. And that’s very
much been the case as the trade war
between the US and China has escalated over
the past 12 months. Now, recent headlines
have pointed to some more positive
developments on this front. But in the last week, things
have taken a turn a bit for the worse. For instance, President
Trump recently said that he would
be willing to wait until after the
presidential election next year to strike any kind
of preliminary deal with China. Within the same week,
he also raised tariffs on France, Argentina,
and Brazil. So these trade tensions that
have helped to buoy the dollar haven’t gone away. So taking this all
together, the trend that has dominated since
2018 of a strong dollar looks set to persist
for some time, at least. What it would take to
reverse the dollar’s fortunes would be a sizable progress
on the US-China trade front, as well as a shoring
up of growth globally. And that looks to
be a tall order.

22 thoughts on “Why the strong US dollar trend may persist | Charts that Count

  1. With the best economy in the world and everyone else following.

    It is just simple the strongest currency logically!

  2. It’s an irony probably lost on Trump that the America First agenda has made it even more favourable for US companies to import.

    Great video. Thanks.

  3. No rocket science here the lawless state of america is building it's economy by devastating other nations economies , it has been going on for decades it was only more apparent with donny

  4. How do they write on the glass board so that it's not backwards for the viewer?!
    Is the video footage flipped or do they just have some amazing backwards writing skills? 😂

  5. A stronger dollar would make aquisition of foreign assets much cheaper. Holding companies could go on a shopping spree if the trend continues.

  6. For ordinary people, the explanation may be sufficient to get a glimpse and start public speculation.
    For those who are knowledgeable, deeper explanation is needed.
    The ultimate culprit of this strong dollar slowing U.S. economic growth is negative interest rate centered economic stimulus in Europe and Japan that had caused global slowdown increasingly dragging the U.S. economy into deflationary spiral. In the beginning of the deflationary period, China's cheap labor and hardware were there. For example, plummeting computer and laptop prices from $2,000 to $200. That alone can explain the deflationary spiral.
    The core idea is to promote healthy inflation rate at each nation and push each nation to do its part in global consumption of products and services. However, as nations ran out of patience in stimulating growth, we began to see more nations implementing aggressive nagative interest rate to permanently depend on other importing nations for their exports to stimulate their growth.
    Then, the U.S. that is on the cusp of a major economic recession is conducting trade war with China to avoid the major recession. Possibly another Great Recession Part 2 after a decade of FRB's dovish monetary policy.
    The bottom line problem is that China needs to do what the U.S. did thus far for half a century. China needs to initiate multi trillion U.S. dollar in trade deficit with the world to stimulate the world economy without integrating political ideology such as the capitalistic Communism. However, U.S. is not willing to give up dollar denominated world trade in transactions.
    For China to take on multi trillion dollar trade deficit with the world for global stimulus, something has got to give. Either giving them capitalistic communism ideology to shine or Yuan denomination in world trade.
    The era of U.S.-Europe trade domination is over as we head into the next economic period of negative interest rates.
    Unfortunately, China will be the only economically powerful nation with positive interest rate.
    Artificial intelligence is just another disruption in the upcoming period of negative interest rate environment that can permanently setback the world into deflationary spiral. Artificial intelligence replacing jobs is same as Alan Greenspan's ideal economy utilizing cheap labor in China under the Creative Destruction ideology. There is no Creative Destruction that has positive and negative words combined into one word in oxymoron. Only industrial revolution based on manufacturing and internet were the few technological advances that actually created more jobs than they destroyed. Artificial intelligence creating jobs is foolish. Artificial intelligence can be used as a trigger to deeper deflationary spiral as income disparity between physical labor and managerial labor widens. Aritifical intelligence is a weapon against humanity's needs and wants based economy supporting flesh and blood.

  7. Donald Trump should be thanking the Fed for maintaining the dollar as it has – it's blunted the trade war impact I'm sure…offsetting the tariffs.

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