The United States of America is clearly the most significant economy and stock market in the world. So it is tempting to assume that any news there would be heavily influential and also impact the US Dollar price action.
That is why it is so important to realise that US dollar trends are entirely a global phenomenon, and can therefore have no impact on the US Dollar price movements in the United States.
For example, the US Dollar does not matter at all to the price of gold in Europe, Australia, Canada, New Zealand and Japan.
Similarly, US Dollar movements have very little impact on the price of other commodities like oil and copper, which are internationally traded in a global market.
The Euro is another example of this. The European Central Bank is on a course to ramp up its QE programme to the tune of €80 billion per month, which will inflate the Euro and drive the price up against the US dollar.
The reason it has not inflated faster is that the European Central Bank still has enormous excess euro reserves, which it is happy to trade on the open market for US dollars.
But it is now obviously under pressure to implement even more QE. A fresh blow to the European currency is likely in the near future.
There is, however, good reason to think that the US Dollar's rate of ascent is slowing. The US rate of change of real GDP growth has moderated recently.
For example, the rate of growth in real GDP per capita growth in the US was 6.8% at the start of 2012, but has slowed to 4.2% by the end of 2015. This slowdown has had a knock-on effect on the rate of change of the US dollar price of gold.
Let us look at some other factors that could be affecting the rate of the US dollar rise. Part of the reason for the recent strength of the US Dollar is the increasing rate of the US interest rate differential.
The United States Treasury is putting out ever more massive amounts of debt at the present time.
US Treasuries are the world's benchmark fixed income asset. Therefore, there are two main levers the US Treasury has at its disposal when it comes to managing the rate of the US dollar rise.It can sell more Treasury debt, thereby inflating the US dollar, or it can also monetise more debt. Monetising debt means printing more money, and the US Treasury has clearly decided to embark on this option, and it has just launched a $20 billion offer of 30-year debt.
The increase in the supply of US Treasuries is going to lower the price of Treasuries and raise the interest rate. This is one of the reasons why the US rate of rise in the rate of real GDP growth has moderated over the last six months.
A second factor is the fall in the value of the Chinese Yuan.
The rise of the Chinese Yuan as the currency of choice in international trade has given rise to an emerging market currency bubble.China is running an ever-expanding $2.3 trillion trade surplus, which means that it is looking to export its excess production to the world in order to inflate the value of the yuan.
But the ability of China to continue to accumulate large amounts of these dollars in its reserves is being seriously challenged by the negative effect of its current high level of economic growth on world growth.
In short, the US rate of rise of real GDP growth is less of a constraint on the US dollar rise than many commentators assume. We are already seeing some signs of a US dollar reversal in the US.
The MSCI World is off its early 2016 highs, with the US Dollar Index sitting at a six-month high. This is a sign that investors are beginning to unwind their bets on the US dollar. The important question is: Will the downward correction of the US dollar continue?
The strong positive response in the US Dollar price of gold has been due to two things. First, it is a clear sign of capital flight from China and other countries where investors have become disillusioned with the rising US dollar.
Comments
Post a Comment