As things stand right now, the dollar over 107 on the dollar index is crushing emerging markets, keeping a cap on commodity prices and beginning this quarter will really start to bite into U.S. multinational corporate earnings in this, the 3rd quarter. The dollar-index futures settled at 96.69 on February 28 and at 104.46 on June 30, 107.16, last.
Meaning that in the first 10 days of Q3 the dollar index is up fully one-third as much as it was in the whole second quarter.
From Finanz und Wirtschaft, July 4:
Don’t fight the Fed. The dollar’s exorbitant privilege as the world’s
reserve currency is never clearer than during times of war. A column by
Stephen S. Roach.
«The US central bank ultimately did the right thing; it has plenty more to do but now seems more willing to do it.»I should have listened to Alan Greenspan – at least when it comes to currency forecasting. The former chair of the Federal Reserve once told me it was a fool’s game, with the odds of getting currency calls right worse than a successful bet on a coin toss. Two years ago, I ignored the maestro’s advice and went out on a limb, predicting that the US dollar would crash by 35%.
After a tantalizing 9% decline in the second half of 2020, the broad dollar index – the real effective exchange rate as calculated by the Bank of International Settlements – has gone the other way, soaring by 12.3% from January 2021 through May 2022. That puts the dollar 2.3% above its level in May 2020, around the time I made this seemingly foolish call. How did I get it so wrong?
Three factors shaped my thinking: America’s current-account deficit, Federal Reserve policy, and TINA («there is no alternative»). I argued that the external deficit was headed for big trouble and that a passive Fed would do little to arrest the problem – effectively forcing the bulk of the current-account adjustment to be concentrated in a weakening currency rather than in rising interest rates. I also took a swipe at the TINA defense of the dollar and tried to make the case for euro and renminbi appreciation.
Enormous current-account deficitBasically, the Fed saved the dollar – aided and abetted by Russian President Vladimir Putin. The US current-account deficit, the crux of my fundamental case against the dollar, has in fact deteriorated dramatically over the past two years. The broadest measure of America’s international balance went from -2% of GDP in the first quarter of 2020 to -4.8% in the first quarter of 2022, with the just-reported data for early 2022 revealing the second-sharpest quarterly deterioration since 1960. America’s current-account deficit hasn’t been this large since mid-2008 in the depths of the global financial crisis....
