On my way down to Phoenix I heard Bob Pisani talk twice about the strong dollar. The logical question is does this mark a top, intermediate or otherwise?
Part of the attention is coming from Warren Buffet who is unwinding his bet against the dollar.
The dollar has had a very strong move. That the move is getting a lot of attention on CNBC now is interesting. The issues that confront the US point to a weaker dollar long term, from the category that's just how markets work. However this just creates an expectation. Expectations do not have to come to fruition but a continued rally in the dollar going into next year would have to overcome some very big headwinds. Possible, but unlikely.
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5 comments:
Roger,
I actually am starting to think that the dollar is ready for a strong rally. Take a look at the late 1990's. Higher interest rates with good equity growth. These are the same circumstances that we have now. The earnings for the S&P 500 of late have been healthy. We are more likely to see a stronger dollar going forward. As for the trade deficit, that isn't an issue at all. We don't produce material items any more. We produce investment opportunities in the form of U.S. debt. Foreigners love that kind of stuff.
David,
Thanks for the comment! Higher rates as a function of more inflation (potential or real) and more debt supply (here I'm thinking of 30 year treasuries coming in Feb) means, to me, higher rates coming from a position of weakness; not good for the dollar.
Does this hold any water?
We are going to see higher rates for three reasons: First, normalization. We are just about there. This was Greenspan's first priority. Second, inflation. I don't see headline doing anything but going back down while energy prices are falling like they are. Core will contnue at a reasonable pace. Then lastly: Katrina. More paper coming to the market means higer interest rates. But there is a limit to how much is coming to the market. Once this has been absorbed, we'll likely see a leveling to normal rates. Keep in mind, 30-year rates are still well below normal (Historic) rates. Economic growth will continue at reasonable levels. I still see the new Fed chief lowering rates somewhat at some point to get that fine "tweaking" down.
As for the dollar, the higher interest rates (compared to trade partners) will be very attracive. Once the interest rate differential settles down, we'll likely see the growth differential be the driving factor in currencies. Still, though, we'll have higher rates than the Euroarea and Japan. Add in higher growth factors comparatively, and you can paint a picture that is dollar positive.
I actually bought a couple hundred long bonds today. The yield to maturity was 4.91% and I borrowed the money at 4.75%; good thing I didn't buy for the spread. I bought because I agree with David about inflation (clearly my belief is a little different in regard to long rates). Core inflation is low and the headline numbers are headed down; wages simply cannot get out of hand in a world of global competition. The rate increases by the FOMC amount to "real interest rates" when measured against anything but headline CPI and money flows to where it earns real returns.
I see continuing strength in the dollar which will continue to export the pain of higher oil to our trading partners in a double whammy way; forcing other nations to consider increase in short rates and gradually slowing the world economy.
The US will likely see a moderately slower economy and strength in the dollar at the same time! This is possible because productivity in the US has been huge relative to Europe for the past 10 years. Even China is raising rates to fight inflation.
Another bump by the FOMC will be enough to cause more talk about a recession; long rates will trade down and by next spring the FOMC will have to reduce short rates! By then, equities will be "on fire".
that would be great if you turn out to be right.
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