Stocks fell yesterday on continued inflation fears and hard landing worries ahead of today’s CPI report. The US Dollar is soaring and it’s causing a bit of upset…for everyone.
Soaring eagles. It’s summertime in the city. If you have never been to New York City in the summer, you are missing out on a unique experience. Of course, there is lots to see and do. The food is second to none. There is no such thing as a bad slice of pizza, though some are better than others. The streets are jam packed with workers hustling to their jobs, wrinkled jackets in hands. Also packing the sidewalks are tourists. You will recognize them because they typically travel in family-groups, wear short pants, don cameras around their necks, walk slowly, and have an awed look on their faces. You may think that look of awe is coming from the unparalleled spectacle of the urban landscape, but it is more likely due to the high cost of just about everything. Making matters worse yet is the strong US Dollar.
That’s right, the US Dollar is stronger than it has been in a long time. In fact, it just hit a multi-decade high as compared to a basket of trading partner currencies. As you can see by the following chart, the Dollar Index has not seen such heights since 2002. A Dollar Index chart is also featured in my daily chartbook (page 12), attached to this note. What is causing the Dollar to strengthen in such a tough economic climate, and what are the implications of the rallying currency?
There are many factors that can impact a currency’s value relative to others. The most prominent driver is economic strength. When one country’s economy is stronger than another, large investors seek the shelter in the currency of the stronger economy. Taking it a step further, investors may wish to invest in stocks and bonds in the stronger country, but they must first convert into the local currency. Like all markets, increased demand for a currency will drive the price higher. Another key input is interest rates. When a country’s sovereign bond yields are rising, foreign investors seek to take advantage of them…but they must first convert their money into the local currency, thus driving that currencies value higher. The US enjoys a unique position in that it is considered a safe harbor for investments. When there is economic strife abroad, investors will seek the safety of the US Dollar and US Treasuries driving both higher. This relationship has been thrown into sharp focus recently. Though the US is experiencing minor economic ructions, they are far less problematic than those of many other countries. That has been driving demand for the dollar and causing it to gain in value. Rising rates along with an aggressively postured Fed is also driving demand as foreign investors seek higher yields. So, now, on to some impacts of that soaring dollar.
There are many implications of a stronger Dollar. A positive impact is when purchasing foreign goods, which will cost less with your stronger currency. The reverse side of that is the negative impact on foreign buyers of US-manufactured goods, which will be more costly. That higher cost will cause lower demand for US exports. In a similar vein, US firms selling goods outside the US which are transacted in local, foreign currencies will accrue less Dollars when repatriating their receipts. So, generally speaking, a strong Dollar is not good for US companies selling goods overseas. We are sure to hear about those impacts in this upcoming earnings season. Another interesting impact of a strong Dollar can be seen in the price of crude oil. Crude is traded in US Dollars, therefore, no matter where you are in the world you would need to convert into US Dollars to purchase oil, and a stronger Dollar means that you will be paying more for a barrel of the critical resource…which is already very expensive at the moment. That higher cost will ultimately reduce demand and cause crude prices to drop. That drop in price occurred yesterday as the Dollar found new highs. For locals, that may offer some relief, however the prevailing supply conditions are likely to overshadow and reduce demand in the near term.
Indeed, it will be a hot summer in the city for foreign tourists. Already expensive food and drinks will surely cost more. Hotel rates are sky high, airline tickets are costlier than ever, but that is not enough to stop folks flocking to the streets to take in the sights and sounds…and those aromas which are also an unforgettable hallmark of the season.
YESTERDAY’S MARKETS
Stocks slipped yesterday as the US Dollar jumped to levels not seen in 20 years fueling earnings fears. The S&P500 fell by -0.92%, the Dow Jones Industrial Average traded lower by -0.62%, the Nasdaq Composite Index gave up -0.95%, and the Russell 2000 Index declined by -0.22%. Bonds rose and 10-year Treasury Note yields fell by -2 basis points to 2.96%. Cryptos declined by -6.41% and Bitcoin was off by -4.73%.
NXT UP