The US dollar is trading at its highest level in six years vs the Japanese yen and is gaining strength at a faster rate than it has at any time since the 1990's. The immediate effects are hard to miss: imports are cheaper, gold is back near $1,200 per ounce, and West Texas Intermediate crude oil is below $92 per barrel (down $0.77 in just the last 24 hours). Even Bitcoin, which often behaves as if the rest of the world were a mere distraction, is getting pinched.
Those Americans who have made the same mistake, i.e., studying themselves to the exclusion of the extrinsic world, may have a hard time understanding why the dollar is suddenly so strong. Aren't we still inflating our currency? Isn't our economy suffering from income inequality and wage stagnation? Didn't the Fed just promise to hold the time-value of money near zero for a “considerable time?”
Yes, yes, and yes, but… nearly every other powerful region of the world (with the sudden and welcome exception of India) is currently in trouble, from a monetary point of view. Russia, facing a glut of oil and severe international sanctions, is in real danger of financial collapse. China is in trouble due to its collapsing real estate market – no blip, but the beginning of a serious economic malaise from which the nation might not emerge for a decade or more. Industrial numbers for China are reported on Tuesday, and many economists are worried that they will reveal the nation already to be in industrial contraction.
Then there is Europe, where economic stagnation is on the verge of turning into economic paralysis. It seems more and more likely that Europe will finally abandon its doomed austerity measures and embrace, you guessed it, quantitative easing, (or QE). Perhaps the strongest tell so far has been the European Central Bank's hiring of Blackrock (BLK) to advise on a possible bond buyback program. As our QE winds down, Europe's is only now getting started.
A strong dollar has potential negatives for US companies, including reduced tourism and reduced exports, but it is a boon for companies that import raw materials. As values deflate in other parts of the world, some money will flow out of US stocks, but there is more than enough money flowing in from wealthy US investors to balance that out. If stocks get a break as winners and losers are sorted out, so much the better for long term investors.
As usual, I can say to long-term investors, “stay the course,” and as usual, all I can say to short-term investors is “good luck.”
Julian Close has been a business writer since the first day of the twenty-first century, having written for PRA International and the United Nations Department of Peacekeeping. He graduated from Davidson College in 1993 and received a Master of Arts in Teaching from Mary Baldwin College in 2011. He became a stockbroker in 1993, but now works for Fresh Brewed Media and uses his powers only for good. You can see closing trades for all Julian's long and short positions and track his long term performance via twitter: @JulianClose_MIC.