After a month or so of welcome respite, the dreaded US dollar has got stronger again.
It really is the scourge of everything.
Stockmarkets have been walloped, the yen, pound and euro have been walloped, and commodities have been walloped. Again.
The US dollar index shows the dollar against the currencies of its major trading partners – the yen, the euro and so on – so it is perhaps the most useful vehicle to study the dollar.
Given the magnitude of foreign exchange markets and the fact the US dollar is the global reserve currency, I see its price as the most important price in the world.
Here we see the US dollar index over the past three years.
You can see that textbook double bottom it made in 2021, with the pattern completing in June. We were writing about it – see here and here.
Since then, through all of the financial and inflationary turmoil of the past year, it has marched inexorably higher. Now it’s retesting its highs around 109.
My stated fear for some time is that it goes to 120. Why 120? There is some history there.
Here is the dollar since 1980. You can see that 120 is the level it got to shortly after the turn of the century – and where it peaked around 2001-2002, helping to usher in that epic bull market in commodities.
It actually got to 165 in 1985 – after Fed chair Paul Volcker tightened a lot quicker and harder than anybody else (not unlike what is happening now). The G5 nations – France, Germany, Japan, the UK and the US – then agreed to weaken it so as to reduce the mounting US trade deficit. What followed were epic bull markets in both the Japanese yen and the German mark, and the stage was set for Japan’s “lost decade”.
This agreement was known as the Plaza Accord. I don’t think we are quite at Plaza Accord levels of concern yet, by the way.
Heaven knows what happens to the UK and Europe if the dollar goes to 165 again. But if it gets through 109, I would say 120 is back on the cards, possibly even this year, more likely early next.
The US dollar is the best of a bad bunch
The euro just slid below parity with the dollar yesterday. The last time that happened was around the turn of the century (when it got to $0.82). It’s at 20 year lows. The pound’s at $1.17 – that’s flash crash, Theresa May Conservative Party Conference depths of rubbish.
The reasons the US dollar is rising are fairly obvious. Capital is panicking and the dollar is the first place it goes to in a panic. It “should” be gold that capital flees to, really, but it isn’t. It’s the dollar.
Then there’s the fact that the Federal Reserve Bank, America’s central bank, is tightening faster and more aggressively than the Bank of Japan, the Bank of England or the European Central Bank. Europe and the UK, meanwhile, have a plethora of gas-related problems and looming winter crises that they could do without.
Forex-wise, the US dollar is the best house in a bad neighbourhood. You could say the same about its economy more generally.
Yesterday was a grim day in the stockmarket, but there were some observations I was happy to make. First, that base metals – copper, zinc, tin, iron ore, and so on – which took one hell of a beating in June, actually held up quite well. That would suggest that they may have already made their lows.
The action in precious metals – platinum and silver especially – over the past week has been less encouraging. Ditto bitcoin.
Oil, meanwhile, looks like it is making an interim bottom and turning up. The last thing central planners want now is higher oil prices, but the market gods will care very little about that.
Might be time to load up again on oil stocks if you are not already loaded. But more broadly speaking, these are risky markets, to put it mildly. Stay defensive, conserve capital, hunker down and await more benevolent financial times.
If you are in or close to London towards the end of the month, I will be performing my lecture with funny bits, How Heavy?, about the history of weights and measures at the Museum of Comedy in London on September 28 and 29. You can buy tickets here.
This article first appeared at Moneyweek.
The US dollar is rising to dangerous levels