Displaying items by tag: dollar
The “Dollar Doom Loop” is the Next Credit Crisis
(Washington)
Investors may not realize it yet, but the Fed is in a quite pickle: damned if they keep hiking, damned if they don’t. In what is being dubbed a potential “Dollar doom loop”, the Fed might create a cycle of excessive Dollar strengthening if it keeps hiking. This may cause an overseas debt crisis as many foreign borrowers, especially EMs like Turkey, have issued excessive Dollar-denominated debt. This would in turn put stress on Europe. Additionally, the strong Dollar strengthening would start to hurt US corporate earnings and exports, in turn weakening the economy and possibly causing the Trump administration to move to artificially weaken the Dollar. That said, if the Fed quits hiking, it risks the economy, which is already hot, quickly overheating.
FINSUM: This situation is very real, but luckily we think there is a pretty simple solution—only proceed slowly with hikes. It should be enough to keep the economy in check (given inflation is not high), but not so much as to send the Dollar surging (imperiling foreign borrowers).
Trump Criticizes Fed
(Washington)
Trump spooked currency and Treasury markets yesterday. Speaking in the context of the US’ trade tussle with China and others, Trump said he wasn’t thrilled with the Fed’s interest rate hikes. He said that in the trade battle with China, the Fed should be accommodative with its policy. Trump called Beijing a currency manipulator, and said the Euro was being manipulated also. Speaking on Trump’s comments and his new consistency in criticizing the Fed, one analyst said “This is now a serious headwind to the dollar”.
FINSUM: It is true that a constantly strengthening currency is difficult to deal with in a trade war, but that the same time, the Fed’s job is to look at US economic fundamentals. That said, how rate decisions would affect the economy via a trade war do seem like they would be within the Fed’s purview.
Beware, EM Currencies are Weakening
(Istanbul)
Emerging markets had a rough first half to the year. Between rising western rates and a trade war, there was not a lot to be happy about in EM assets. Then, a few weeks ago, many sources were saying the bear market was over and it was time for a rally. However, investors need to stay sharp, as EM currencies are still sliding, which will lead to lower growth. Weaker currencies also make it hard to pay back Dollar-denominated debt, which could hurt credit. There are also country-specific issues, like the growing trade battle between Turkey and the US.
FINSUM: There are still a lot of macroeconomic developments moving against EMs, but to be fair, the best rallies start in the darkest hours.
An Emerging Markets Rally is Starting
(Rio de Janeiro)
Emerging markets have been in a really tough patch lately and generally entered a bear market recently. Their losses have been urged on by higher rates and a stronger Dollar. However, the situation may be about to turn around. The argument is from UBS Asset Management, who says that EMs have de-risked from five years ago during the Taper Tantrum, and that they are in a much stronger financial position now. In particular, whereas investors were worried about EM risk during the Taper Tantrum, now the losses have just been down to a rising Dollar, which does not signal any fundamental weakness.
FINSUM: Our worry with this argument is the lack of a catalyst. While all of what UBS argues may be true, what will cause the market to comprehensively reverse?
Currencies to Buy for a Recession
(New York)
Whether investors like it or not, a lot of signs are currently pointing to a pending recession. The yield curve has flattened dramatically, and the trade war and hawkish Fed loom large. With that in mind, JP Morgan has put out a piece telling investors which currencies to own when a recession hits. According to Paul Meggyesi of JP Morgan, it will be best to own the US Dollar, Swiss France, Japanese Yen, and Singapore Dollar, and to get rid of any emerging market currencies. The Yen and Dollar look best, as in a deleveraging scenario, the whole world needs to buy back Dollars as it is the default funding currency.
FINSUM: No surprises here, but given how long it has been since a recession, it is always useful to revisit the logics and strategies to use during one.