The US Dollar is the Puzzle Today

While the UUP ETF (dollar bull ETF, with the two largest weights being the euro and the yen) is now pretty oversold, when talking to a long-time friend of mine from Cincinnati, who is a stockbroker and someone like myself, has a strong interest in all things capital-market related, I kept thinking how everything about tax reform and the pro-growth economic policies of the present Administration has played out “according to Hoyle” so to speak, the weak US dollar remains the puzzle or outlier.

For those of us old enough to remember the earlier days of the Reagan Administration, the dollar started screaming higher in 1983 – 1985, and ultimately created the Rust Belt – the graveyards of traditional Midwest exporters like Caterpillar, Deere, the Steel manufacturers, etc. etc.

It was only the G-6 meeting in late 1985 – early 1986 that started to weaken the US dollar eventually culminating in the October 19 ’87 stock market crash, after the dollar had gotten too weak.

You would think the US dollar would be drifting higher the last few months with tax reform passage, stronger economic growth, and – finally – rising interest rates although with the 10-year Treasury yield back to 2.62% today, that yield is just back at its March ’17 high.

The US stock and bond market reactions are so orderly today, relative to the mid-1980’s.

In the March of 1987 the 30-year US Treasury bond last 10 points in a month after crude oil started to rise sharply, and the US stock market was screaming higher: I thought i read the Dow Jones 30% was up 22% from Jan 1 ’87 though the end of July ’87. This led to rising inflation worries (the fear was the return of ’70’s style inflation, which was still the last war being fought), and the weaker dollar after 1986 and it culminated in October, 1987.

With interest rates still negative in Europe, tax reform in the US, clearly stronger economic growth in the United States although to what degree (3% – 4% ?) remains unknown, watching the US dollar trade every day like a wet blanket, seems strangely out of synch.

The rough roadmap for currency valuations are dependent upon:

1.) Relative monetary policies – the US is clearly tightening US monetary policy and shrinking while Europe is still engaging in QE and negative rates;

2.) Relative fiscal policies – the tax reform package just passed is highly likely to stimulate US private sector growth and investment but again the degree remains to be seen;

3.) Relative trade policies – is NAFTA threats and the potential for a trade squabbles with China impacting the dollar ?

There is more, but readers get the point.

Maybe a big GDP print will move it northeast, quickly.

Thanks for reading.

 

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