The dollar: Heads I win, tails you lose The dollar: Heads I win, tails you lose\images\insights\article\dollar-small.jpg January 21 2020 September 25 2019

The dollar: Heads I win, tails you lose

The dollar has strengthened even as the Fed has cut rates.
Published September 25 2019
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In recent months, the U.S. dollar has been enjoying sizable gains against most developed economies, and advanced somewhat against a host of emerging currencies. But what is unusual, the dollar’s appreciation has coincided with Federal Reserve rate cuts. Typically, currencies weaken when their respective key interest rate is lowered. It’s textbook economics. So, the unusual development has left a raft of questions by investors. But if rules were made to be broken, economic theories are made to be contradicted. It is often the only way to judge their worth. Ayn Rand once wrote, “Contradictions do not exist. Whenever you think you are facing a contradiction, check your premises. You will find that one of them is wrong.”

Since the Fed cut rates in July for the first time since the financial crisis, the dollar has enjoyed its largest monthly rally in years. Major global central banks began to ease their own monetary policies, effectively front-running the Fed’s September quarter-point cut. Moreover, prior to this reduction, global growth figures had begun to take a turn for the worse, trade tensions with China went from bad to worse and inflation expectations once again began to sour. This economic trifecta played squarely in the dollar’s favor by preserving its growth and interest advantage against the developed economies, while providing safety for emerging market investors worried about the spillover effects of a trade war. In essence, the dollar is in an enviable “win-win” position for now.

But a robust dollar can backfire on the domestic economy because of its Jekyll-and-Hyde influence on global trade. The Jekyll side attracts foreign capital into the U.S., makes imports more affordable and helps to cement the currency’s reserve status. On the other hand, the Hyde quality of a strong dollar strains a host of emerging countries who have issued debt denominated in dollars, dampens commodity prices in a world desperate for inflation and indirectly offsets some of the objectives of U.S. tariffs on Chinese goods. It may seem counterintuitive, but a strong dollar doesn’t make America stronger.

Tags International/Global . Fixed Income . Markets/Economy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Federated Investment Management Company