It's The Us Dollar Versus Everything
The US dollar's relentless march to near 12-year highs is both one of the major headlines and a major driver of other headlines.
By Vikram Rangala
Tuesday, March 10, 2015 - 00:00
The strong dollar is part of the reason for the volatility and price extremes in oil, gold, Treasuries, and most major currencies, including the euro. Oh, and the stock market.
The timing of this dollar dominance makes it different from almost all other dollar surges save perhaps the all-time high in 1985, when the dollar index hit 1.64. That surge was only ended when the major Western economies signed the Plaza Accord and rigged it back down. (So much for the free market.)
The high dollar at that time was hurting US exports, but as is the case today, was great for investors and currency traders. This time, too, there may come a point when central banks and governments will have to sacrifice financial gains for long-term economic strength. In other words, they'll have to give up some paper profits to ensure everyone, including US manufacturers, can continue to make stuff.
But long before we reach such an extreme, we have to deal with markets that continue to trend strongly, the dollar among the strongest of them. And that word, "trend," is likely to be the friend of investors and traders in all markets for the rest of the year. The problem right now is, no one knows how long the current trends will continue.
THE UPCOMING FOMC MEETING
The Fed governors are about to enter their five-day "blackout" period before their March 17-18 meeting. During that time, they can't make any public statements about monetary policy. So instead, just about everybody else will talk about what they would be saying if they could say anything.
It's a lot of sound and fury, but it may well signify nothing. Most investors agree that the Fed will pointedly remove the word "patient" from their statement, officially putting a rate increase on the table for the next meeting in summer. Traders I listen to agree that it is priced into the market and has been for a while.
The thing about an increase being "on the table," however, is that it can stay on the table for as long as they want to keep it there. Fed Chair Yellen clearly told Congress that she would not be locked into a timetable for raising rates. She also said that the risks of a strong dollar are part of the Fed's calculations, along with their twin mandates of price stability and maximum employment.
So the Fed removing "patient" from their statement is not going to be a surprise if it happens. Which means that the Fed is unlikely to be able to stop the dollar's rise, nor do they have a pressing reason to do it now.
IS CHEAP OIL THAT BAD? CHEAP GOLD? CHEAP OTHER STUFF?
If we dumb down our oil market analysis to simply supply and demand, then we have to ask, if cheap oil is a problem, why does OPEC keep pumping it? Their agenda, which is preventing shale oil and other competition from gaining market share, is helped by cheap oil.
And the US, though its shale oil business suffers, reaps plenty of other benefits from reduced energy costs. One obvious sign this summer will be that Americans will be taking a lot of road trips. That is, unless they're flying on cheap air tickets to Europe, where their dollars will buy them more than at any time in the past decade. I don't think you can underestimate the economic benefits of a nation finally emerging from a long recession and two wars and being able to take long-overdue holidays.
As for gold, I made the case yesterday that the trend was still down, but that it would be volatile enough that binary option traders would have plenty of opportunities to trade the long and short side of short-term price action. If and when gold returns to being a safe haven investment, it may not be so bad if it's attractively priced with room to grow.
STRONG DOLLAR, STRONG ECONOMY? SOMETIMES, SORT OF.
Plenty of economists have pointed out that "strong" and "weak" are not helpful words to use in describe a currency's exchange rate. In this case, the strong US dollar is a result of the US coming out of a recession and reducing its budget deficit, both key features of an improving economy.
But that doesn't mean that the dollar needs to keep getting "stronger" indefinitely. The risks of a strong dollar are most obvious in US exports, which become more expensive for people in other countries to buy. For the same reason, exports from places like Europe, China, and Japan become cheaper for American consumers.
This can hurt some US manufacturers, but mainly those who try to compete on the same types of products with overseas producers. American companies can't win a price war against companies that pay employees less than a dollar an hour, often much less, even with a weak dollar. The way for US companies to compete is to make stuff other companies can't make as well.
In the case of Apple, the edge comes from design and marketing, even though the actual iPhones and iPads, and now watches, are made in China. The dollar exchange rate doesn't really hurt Apple the way it hurts some others.
And in the big picture, the US economy is growing in a healthy enough way that it's safe to allow Europe and China to leverage their weak currencies to boost their own economies. China is close to recession. And Japan may be facing its last chance to return to being a major Asian player, or else be eclipsed by India and possibly SE Asia.
It's worth remembering that the dollar began its role as the global reserve currency with theBretton Woods agreement and in one way or another, all of these currencies (and gold) have always been defined in relation to it. The US may decide that a strong dollar is okay for a few years, not just because it is an act of generosity to the world, but because it's likely to benefit the US in the long run.
Most of all, it would help Europe avoid the kind of long-term unrest and stagnation that has caused trouble in the past. For that reason alone, Janet Yellen is likely to avoid undercutting the efforts of her ECB counterpart, Mario Draghi. In fact, some suggest she's likely to coordinate with him, which might not be a bad thing.
By the way, you can trade all of the financial products I mentioned above using Nadex binary options, including the USD/JPY, EUR/USD, Crude Oil, and Gold. You can also trade the Fed Funds rate.
When markets are at extremes and the VIX is jumping the way it did the last few days, you may not have a clear sense of the trend and how much further it will continue. It may be more manageable to trade limited-risk, short-term instruments.
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