Dropping the value of the U.S. dollar, the otherwise strong greenback dropped 3.7% against a basket of foreign currencies, including the Euro and Japanese Yen, all connected with the expectation that inflation, or, more specifically, interest rates are dropping in the United States. Inflation, primarily driven by 81-year-old President Joe Biden’s proxy war against the Russian Federation, fueled the worst inflation of over 40 years. Biden tried but failed to apply punitive economic sanctions against Russian President Vladimir Putin and the Russian Federation for its 2022 Ukraine invasion. Biden thought hitting Putin where it counted would force the 71-year-old Russian president to withdraw his forces from Ukraine. Biden insisted that the
U.S. and all its European allies boycott Russian oil, hoping it would drive Russia off Ukrainian soil.
Biden thought he could pressure Putin into withdrawing his troops from Ukraine by boycotting Russian oil. Instead, it all backfired with India and China, more that making up for the loss of U.S. and European oil buys from Russia. Putin out-smarted Biden, going to traditional allies of his that refused to go alone with Biden’s Russian oil embargo. Instead of pressuring Putin to get out of Ukraine, it did the exact opposite, taking the proxy war as a fight between the U.S. and Moscow. Biden’s Russian oil embargo caused worldwide shortages and skyrocketing prices, leading to the worst inflation in over 40 years. Federal Reserve Board Chairman Jerome Powell hiked the Federal Funds Rate aggressively, driving the benchmark rate that the Fed lends to commercial banks at 5.5%, a twenty year high. Powell’s rate hikes drove the Prime Interest Rate to 8.5%, the rate banks lend to preferred corporate customers.
Powell knew that his rate hikes would slow down the annual inflation rate that jumped to in June 2022 to 9.1%, a 40-year-high, to 3.24% in Oct., dramatically lower, but so is the expected value of the U.S. dollar. Wall Street has responded with the Dow Jones Industrial Average jumping in the last month from about 32,000 to 35,500, about 10%. Whether that trend continues through Christmas is anyone’s guess. Markets now expect the Fed to hold interest rates steady through year’s end but expect to start aggressively cutting rates in 2024. Powell is especially concerned about the national real estate market, dropping from Sept. 2023 to Oct. 2023 4.3%, all because mortgage interest rates peaked at about 7%. While mortgage rates have dropped to about 6.5%, they’re still far too high to prompt a recovery in residential and commercial real estate now forecasted to drop even more.
Losing 7% of its value in Oct., the U .S. dollar should continue to drop in value over the next several months with the Fed. poised to start slashing interest rates. Economists have talked about a soft-landing, with Powell engineering a drop in the Consumer Price Index [CPI], all based on hiking interest rates. “I can see two more quarters of U.S. dollar weakness, particularly if it becomes more clear that the Fed is going to cut interest rates,” said Ulrich Leuchtmann, chief of foreign exchange at Commerzbank. U.K. capital markets chief Cameron Willard at Sweden’s Handelsbanken still sees the dollar as the strongest reserve currency. Willard sees geopolitical risks driving currency investors back to the U.S. dollar. “I struggle to see a longer-term dollar depreciation,” Willard said. Willard still sees nothing on the horizon for the dollar replaced as the global reserve currency.
U.S. exporters of fossil fuel and agricultural products are helped by the lower dollar, despite the fact that foreign imports tend to cost more. Japan, Korea, India and other countries using the euro would benefit from a weak dollar, making commodity purchases more affordable. Mark McCormick at TD Securities sees the lower dollar as benefitting commodity purchases, despite making imports more costly in the U.S. “A weaker dollar is a rising tide that lifts all boats,” McCormick said, saying emerging markets benefit from a lower dollar. “A weakening dollar basically makes the U .S. a little bit poorer because they pay more for the goods they are importing, and get less for the goods they are exporting,” said Leuctmann. Currencies valuations are based on T-bill yields, something coming down from their November peaks. More interest rates drops could further weaken the dollar.
Federal Reserve Board Chairman Jerome Powell sees inflation no longer as the key culprit in the economy, shifting attention to deflationary pressure from higher interest rates. Powell sees the end to the Fed’s tightening cycle, now adjusting rates in 2024 to find more ways to stimulate the economy. Powell shows greater future concern in the nation’s residential and commercial real estate markets, a main driver of Gross Domestic Product [GDP]. If real estate sales remain anemic, it could send the economy into recession in 2024, forcing Powell to start slashing interest rates more quickly than expected. “I’m sure that inflation will decrease further in the U.S., but the speed of this development will be lower than it could be with a strong dollar,” Leuchtmann. If the labor market softens, it would push Powell to act more quickly to cut rates before recession hits in 2024.
About the Author
John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He’s editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.
