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As the U.S. dollar grows stronger, precious metals prices go lower, since they are dollar based, it costs more to buy them.
Thus, prices are slumping as The Wall Street Journal’s Dollar Index reached its highest reading in 13 months last week, having risen steadily since June and 2 percent in September alone, the WSJ reported.
The dollar’s value has moved up steadily as expectations have grown that the U.S. Federal Reserve will reduce its $120-billion monthly bond purchases, a policy shift the Fed signaled last month. And as we have forecast, they will raise interest rates. Thus, the higher rates rise, so too the value of the dollar will increase.
Bad for Blue Chips
However, the stronger the buck becomes, the more it bodes poorly for U.S. blue-chip stocks.
Companies listed on the Standard & Poor’s 500 index collect about 40 percent of their revenues from outside the U.S., the WSJ said.
“A stronger dollar can be a bit of a wrecking ball,” investment manager James Athey at Aberdeen Standard Investments told the WSJ.
“Broadly, it’s a tightening of global financial conditions,” he said.
The dollar generally gains strength under two conditions, the WSJ said: first, when the global economy is weak and investors shelter value in the relative safety of the dollar; and, second, when the U.S. economy is doing well compared to that of other nations.
TREND FORECAST: While the WSJ claims that both conditions are currently in place, we disagree. Yes, the dollar is stronger than other currencies, but not because of its intrinsic value, but rather because there is a global decline ahead and there are no real currency competitors.
And as for the U.S. economy doing better than other nations, when the U.S. economy falls it will signal the onset of the Greatest Depression, and it will fall as hard and deep as other major economies in Europe and Asia.
Taper Tantrum?
After the Fed announced it would taper its bond purchases, yields on 10-year U.S. treasury rose above 1.5 percent, a level not matched since June.
The Fed also is considering raising interest rates next year, which would make dollar holdings more attractive, as we reported in “Will Fed Taper Bond Purchases?” (28 Sep 2021).
Investors are buying bonds to lock in those higher rates, driving up demand for dollars and dollar-denominated investments.
“Would you rather own a German bond with a yield around -0.3 percent or a [bond] denominated in the world’s reserve currency that yields 1.5 percent?” Athey said. “It’s a no-brainer.”
The European Central Bank has begun to discuss plans to curtail stimulus spending but, unlike the Fed, has given no clues about when it might begin to do so. (See “ECB Pledges to Keep Rates Lower Longer,” 27 Jul 2021).
The euro slid 1 percent against the dollar last week.
Also, copper, oil, and many other commodities are priced in dollars, so a stronger dollar makes them more expensive.
Higher costs for those goods might weaken demand, relieving some pressure on inflation, the WSJ said.
TRENDPOST: As we have long been reporting, a stronger dollar shrinks the value of money earned outside the U.S. and poses special risks to economies of developing nations, where a stronger dollar makes it harder for those countries to make payments on what already are enormous dollar-denominated debts.
And when emerging market economies dive, social unrest will escalate as people take to the streets to protest the lack of basic living standards, government corruption, crime and violence.
This will also escalate the already tenuous refugee crisis as people leave their countries to seek safe haven nations. Thus, there will be strong anti-immigration populist movements that will unite under the anti-vax, anti-tax, anti-establishment political umbrella.