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Why A Strong Dollar Is Not As Good As You Think

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For most people, a strong currency means a strong country. A weak country has a weak currency. A strong dollar…a strong US as bullish.

But that’s Tarzan-level thinking. The main proponents of a strong dollar are large Wall Street investment firms that act as asset managers or broker/dealers for foreigners. A strong dollar means more investors are buying US-denominated securities, such as Treasuries and plain cash.

In that sense, a strong dollar will lead to a hyper-financialization of the US economy. It’s best to call it an overvalued dollar because the dollar is always strong, even when the dollar index is just below 100.

When financial securities become the only business in town, it hurts most other sectors of the economy. This is especially true for exporters and manufacturers who compete with companies overseas making the same thing. The Boeing 737 Max is currently more expensive than the Airbus 320neo for airlines around the world.

In an economy where inflation and declining demand have squeezed corporate margins, a strong dollar could make it easier to source goods abroad and drive local suppliers out of business. If they are manufacturers themselves, they outsource their work to Mexico or Asia, leading to layoffs and wage stagnation at home.

Eric Merlis, Managing Director and Co-Head of Global Markets, Citizens, said: “This has dampened or restrained the rise in stock prices.”

Seema Shah, Senior Global Strategist, Principal Asset Management told the New York Times
new york times
On Thursday, it said the Federal Reserve’s current interest rate policy “overvalues ​​the U.S. dollar and limits the ability of other global central banks to manage the economy properly.”

Higher interest rates mean higher bond yields, which bond investors love. They buy government bonds and such.of Times This article urges the Fed to convince the European Central Bank (ECB), Bank of England and Bank of Japan to raise interest rates as they did in the US to stop big investment firms from injecting money into the dollar. I escaped.

“European and Japanese interest rates have very important domestic and international functions. says Jeff Ferry, chief economist at the think tank Coalition for a Properous America. “If the ECB raises interest rates to our level, the recession will get worse and businesses are already turning their backs on the wall because of energy costs. I think it will,” Ferry says.

Sebastien Galy, senior macro strategist at Nordea Asset Management, agreed that the US is putting pressure on Japan and the ECB to raise interest rates. “This next leg could happen in Japan,” he said, citing Washington’s threat to withhold some of its F-15 fighter jets to Japan.

Dollar index hits 20-year high

The dollar index is trading around 111, its highest since 2002.

why are you so strong? One reason is that the dollar is the primary reserve currency held by central banks around the world. When the global economic outlook is weak, large investors want to hold stable, high-quality bonds. The biggest market for that is the US Another reason is that the Fed is raising rates, making Treasury yields attractive to foreign investors.

“We could be here for a while, until the central bank catches up with the Fed,” said Roger Arriaga Diaz, chief economist at Vanguard.

For government officials and some influential investment banks that deal daily with Europe and Japan, the dollar should be free to go as strong or as weak as investors want.

But the market is more than Treasury Secretary and BlackRock
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Many investors on the street and across the country will privately tell you that the dollar shouldn’t always go where it wants to go.

we have been here before.

The dollar strengthened further in 1985, when the dollar index hit 170. It was like there were no other currencies in the world. Ronald Reagan, who loved the free market, made the Plaza Accord to bring the dollar up to manageable levels.

Brazil: Example of Currency Management

In 2009, Brazil’s Finance Minister Guido Mantega said the US and Europe were waging a “currency war” against the developed world by cutting interest rates to zero. No one wanted to own dollar-denominated bonds. Yields were steadily declining. US and European investors flocked to high-yield, high-volume markets. Brazil was one of them. Brazil’s Real hit his $1.50 high even though the Brazilian economy was still hit by the Great Recession. As such, Mantega imposed a tax on all foreign investors buying Brazilian government bonds. Wall Street fund managers complained. But the long-term guys stuck. Brazil did not suddenly go bankrupt. Also, the Brazilian real began to depreciate, making Brazilian exports competitive again.

“At the time, the market learned something about risk management in Brazil,” says Gary. “We cannot (ultimately) push a country against the wall with an overvalued currency without a reaction from the authorities.”

But US officials are happy with a strong dollar. There is no talk of managing it to a more tolerable level. Also, the Fed doesn’t plan to avoid rate hikes anytime soon.

“It would be best to manage the dollar in a flexible way by setting market access fees for foreign investors,” Ferry says. “That way the Fed can keep the dollar down for a while and not have the dollar jump 20% like it has in the last few months. You don’t have to use it all the time, but every trade in U.S. securities from abroad will give you 2 With a market access charge of 10% to 3%, the dollar will reach healthier levels,” Ferry thinks. “The money goes to the Treasury. We will use it to pay off federal debt.”

Like the fee Brazil undermined its currency in 2009-10, the market access fee means that Japanese investment firms wanting to buy $100 government bonds have to pay $3 when the fee is 3%. means that a $100 Treasury bond costs $103. Short-term traders think twice. For proponents of the Brazilian approach, the market access fee is a temporary way to curb dollar frenzy in moments like this.

The Treasury Department and Fed are not hinting at anything like a new Plaza Accord deal. early this month, financial times Warned Washington not to even think about it in a not-so-subtle headline: “Forget the new Plaza Accord.”

strong dollar. weak country.

An overvalued dollar is bad for emerging markets, too.

“They are facing headwinds because of dollar debt,” Citizens’ Marlis said. ‘ said.

Countries such as Egypt and Pakistan suffer from dollar-denominated external debt. Exports create dollars for emerging markets, but these countries need that income to buy commodities they don’t produce domestically, such as oil and gas, grains and minerals.

A strong dollar is bad news for weak countries. It makes them even weaker.

One is the inability to pay the Paris Club. Another is the inability to import wheat and oil. It could lead to ‘hit the Bastille’ moments in countries where economies have collapsed and there is no food or fuel.

Of course, these are worst-case scenarios exacerbated by a strong dollar compared to countries with already weak and undervalued currencies. But managing a strong dollar in times like these can avert a crisis without hurting financial markets.

Of course, we all know that a strong dollar means US consumers can buy cheaper goods from abroad. However, this comes at a price. As their industrial base continues to favor imports, they have to buy cheaper goods from abroad. And the previous manufacturing income was replaced by a Macy’s retailer and a doorman at his level of W Hotels instead.

“The financial industry loves a strong dollar because it makes it easier to sell what’s on the shelf – securities priced in dollars,” says Ferry. “With so much international trade in industrial and agricultural products, all American producers in a dollar-strong environment will be forced to pay higher prices for their products on world markets while their foreign competitors are cheaper. We’re going to lose market share that way as well,” says Ferry. “The dollar is overvalued. We all know it. It’s bad for almost everyone except those who sell financial securities.”

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