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Dollar On Course For Worst Performance In Over A Decade (#GotBitcoin?)

Investors bet that the Fed will be forced to keep rates lower for longer, lowering real yields in U.S. Dollar On Course For Worst Month In Almost A Decade (#GotBitcoin?)

The dollar is on track to close out its worst month since April 2011 as a rise in coronavirus infections across the U.S. threatens to damp the economic recovery and keep low interest rates in place for longer.


Deutsche Bank Short US Dollar Index (USDX)

Juice The Stock Market And Destroy The Dollar!! (#GotBitcoin?)

Bloomberg: Americans Trade Depreciating Dollars For Bitcoin

The ICE U.S. Dollar Index, which measures the greenback against a basket of other currencies, weakened 0.8% Monday to its lowest level since June 2018, according to FactSet.

Investors have sold the dollar and bought currencies of countries with lower infection levels in recent weeks. That has erased 3.8% of the currency’s value in July, putting it on track for its worst one-month performance in over nine years.

The recent surge in cases in parts of the U.S. has prompted local authorities to halt or rewind plans to let business activity resume, raising doubts about the prospects for the economy. California, Texas and Florida, which are among the hardest-hit states, together account for more than a quarter of U.S. gross domestic product.

New claims for unemployment benefits, which offer a view on the health of the labor market, last week climbed for the first time in four months, suggesting that the recovery may be faltering.

Weekly applications, which surpassed six million in the last week of March, had previously fallen as government-support programs and the gradual reopening of economies allowed employers to keep staff on payrolls and bring workers back.

Investors are betting that the Federal Reserve will offer a gloomier outlook for the economy following a two-day meeting that ends Wednesday. Fed officials have already warned this month that the economy faces a deeper downturn and more difficult recovery if the country doesn’t take more effective action to slow the spread of the virus.

The economic signals are “telling you that the V-shaped recovery has basically stopped. It’s not V anymore. It’s plateauing,” said Derek Halpenny, head of research for global markets in the European region at MUFG Bank. “The optimism that was there in June will be gone and the message is going to be the Fed needs to do more.”

Monday’s selloff put the ICE dollar index on track for its sharpest one-day decline since May 26. The recent move has been accelerated by the Fed’s decision to slash interest rates to near zero, removing much of the differential between the U.S. and other developed countries where rates have been negative for some time.

The yield on the 10-year U.S. Treasury note dropped to 0.584% on Monday, from 1.910% at the end of last year, according to Tradeweb.

Real yields, which reflect the value of bond yields after adjusting for inflation expectations, have plunged for Treasurys, contributing to the dollar weakness. That is also pushing up demand for assets that don’t offer a yield, such as gold, by making them more attractive.

“The real-yield attraction of the dollar is less than it has ever been,” said Kit Juckes, a strategist at Société Générale.

The central bank is likely to remain cautious in its comments this week, Mr. Juckes said. “This Fed is a Fed that is working hand in glove with the U.S. government to lessen the blow to the U.S. economy.”

In contrast with the dollar’s decline, U.S. stocks have rallied since March, erasing almost all of the S&P 500 index’s losses for this year and pushing the tech-heavy Nasdaq Composite to records. Last week, both benchmarks gave up some of those gains as investors’ optimism waned.

The dollar selloff could stabilize or even reverse as the currency still retains its appeal as a haven asset, said Jane Foley, head of foreign-exchange strategy at Rabobank. Investors are already pricing in a weaker outlook from the Fed and lackluster economic data, likely limiting dollar weakness going further.

“There’s been a big flow out of the U.S. dollar, but we have seen stock markets not so eager to shift higher from current levels in recent weeks,” Ms. Foley said. “I’m wondering if the momentum behind the sell dollar trade has gone a little bit too far.”

Fed Outlook Turns Gloomier As Recession Deepens

Central bank leaders warn of hits to confidence, higher joblessness and more business bankruptcies.

Federal Reserve officials meet Tuesday and Wednesday facing growing doubts about the prospect for a sustained economic rebound due to the nation’s uneven public-health response to the coronavirus.

Officials have warned this month in speeches and interviews that the economy faces a deeper downturn and more difficult recovery if the country doesn’t take more effective action to slow the spread of infection.

Since the Fed’s mid-June policy meeting, virus infection rates have accelerated in many states that were among the first to encourage businesses to reopen. Business leaders and economists have warned that hard-hit industries such as travel, entertainment and hospitality will face a more difficult recovery if consumers don’t feel confident spending money indoors and gathering in large groups.

The Fed isn’t likely to roll out new stimulus measures this week but is debating how to provide more support to the economy once the economic outlook becomes clearer. They could do this by adjusting their purchases of Treasury and mortgage securities and by providing more detail about what conditions would lead them to consider withdrawing stimulus.

Fed officials have focused their recent comments on the imperative of suppressing the virus by more aggressively adopting social-distancing measures, including wearing masks, and by boosting the capacity to test, trace and isolate known infection cases.

“How well we follow the health-care protocols from here is going to be the primary economic tool we have,” said Dallas Fed President Robert Kaplan in a July 16 interview.

After the pandemic triggered widespread shutdowns in March, Boston Fed President Eric Rosengren said he had expected infections to recede by the summer much as it has in Europe. “Unfortunately, that is not the case,” he said in a July 8 interview. “We have not been nearly as successful.”

The longer that infection rates flare up, the harder it will be for a range of industries that employ millions of Americans to recover. That, in turn, could lead to higher spells of extended joblessness, business failure and stress on the banking system.

The economy will face “severe economic consequences” if the public health response doesn’t improve, Mr. Rosengren said. The Fed’s policy response is “not going to be able to offset all the losses if we continue to make serious public health mistakes.”

He said he is particularly troubled about what could happen in the fall, as college students return to campus from around the country, younger students go back to school, and cold weather makes it harder for restaurants to operate outdoor dining.

Regional data from the online reservations site OpenTable shows the Northeast is the only part of the U.S. that saw an increase in restaurant dining through mid-July on a weekly basis, suggesting that consumers are more willing to dine at restaurants in areas where the virus is under control.

The economy added 7.5 million jobs in May and June but still has 14.7 million fewer jobs than before the pandemic.

Coronavirus infections have accelerated in several large states since mid-June, when the Labor Department conducted its most recent survey of payroll growth.

Real-time data tracked by Fed economists suggested that strong gains in hiring in May and June may not be sustained, said Fed governor Lael Brainard in a speech July 14.

“Business leaders are getting worried. Consumers are getting worried,” Atlanta Fed President Raphael Bostic said July 7 in a discussion hosted by the Tennessee Business Roundtable. “There is a real sense that this might go on longer than we had hoped and we had expected and we had planned for.”

One risk for the Fed is that markets and the public expect it will fix problems its tools aren’t suited for, said former Fed governor Randall Kroszner.

“There is nothing the Fed can do to bring back the airline industry, to replace broken supply chains, to make people feel comfortable going out to shopping malls,” said Mr. Kroszner, who now teaches at the University of Chicago. “People have the view the Fed is so powerful that it can do anything, and it can’t.”

Government policy since March has focused on preserving income for unemployed workers and businesses after the economy was put into the equivalent of a medically induced coma to stop the pandemic’s spread.

Fed officials have broadly supported efforts to offset declines in income for unemployed workers and a drop in revenues for state and local governments.

The Fed has launched emergency-lending programs designed to support market functioning and to lower lending costs for a range of household, government and business borrowers.

Fed Vice Chairman Richard Clarida last month warned the improvements in financial markets may not last due to the path of the virus. At a minimum, the Fed’s lending programs had bought some time for businesses to hang on until an economic recovery spreads, he said.

Officials have expressed alarm that businesses receiving relief from the $510 billion Paycheck Protection Program won’t be able to withstand further declines in demand due to virus fears.

Mr. Kaplan said he has spoken to a range of companies that used those funds to bring back their employees and reopen. Their initial optimism has faded amid renewed slowdowns in business as virus infection rates flare up, and some businesses are seeing a substantial slowdown in foot traffic.

“The jury is now very much out … because they’re not well equipped for another slowdown,” Mr. Kaplan said.

Next Economic Crisis: Developing-Nation Debt

Emerging economies like Zambia’s were ill-prepared for the global recession’s financial pain.

Zambia was once a model in Wall Street’s rush to issue debt for the world’s poorest nations, attracting bigger orders and lower interest rates than some more-developed countries.

Less than a decade later, the Southern African nation is straining to pay back more than $11 billion in loans.

The world is gearing up for a battle over developing-country debt like few it has seen before. Rich and poor countries are at loggerheads with private investors that, over the past decade, replaced governments as the biggest creditors to emerging markets.

Zambia looks set to become a case study in the clash over how to ease the debt load of developing countries that were ill-prepared for the financial pain inflicted by the coronavirus pandemic.

Zambian government debt is on course to surpass 100% of gross domestic product this year, as the International Monetary Fund forecasts the economy will contract 5% —the prediction from October was for 1.7% growth. Without relief, it would need to spend more than a third of its revenue to service debt, and much more in coming years.

In late May, the government appointed Lazard Ltd. as financial adviser, the first step toward a wholesale debt restructuring.

Two months later, talks with creditors are yet to begin, according to people involved in the negotiations.

Commodity prices sent tumbling by the global economic slowdown and a crash in local currencies have left many poor nations like Zambia unable to pay off the legacy of more than a decade of foreign borrowing. The debt—much of it held by banks and fund managers in London, New York and Frankfurt—was supposed to pay for building infrastructure, fighting disease and teaching children.

Instead, governments are struggling to find the cash to fortify their health systems for a wave of Covid-19 cases as debt service eats up large chunks of their revenue.

“Even before the crisis, a lot of countries were facing a lot of debt pressures,” said Abebe Aemro Selassie, director of the IMF’s African Department, “And you now have this really massive and all-encompassing shock.”

The prices of commodities like copper and oil, crucial exports for many emerging-markets, have rebounded somewhat since March. But the slowdown in global growth and trade is still cutting into government finances.

Of the 24 low-income countries that have issued foreign-currency bonds since the turn of the millennium, raising a total $135 billion, at least half —including Ghana and Zambia—are now at high risk of debt distress or already in distress, according to the IMF.

Negotiations taking place on conference calls to provide debt relief have gotten bogged down. Unable to meet face-to-face due to travel restrictions, investors say, it can be difficult to build trust with government officials—and each other—from behind a screen, where body language can be hard to read and concerns about privacy can limit talks.

Different groups of creditors blame each other. Asset managers and hedge funds—a fragmented group that can be slow to reach consensus—point fingers at China, which has also lent heavily to many poor countries.

Western governments, which wrote off debt in previous crises, have said they don’t want to bail out Beijing or private investors. Because much of Chinese debt came from state companies and banks, bondholders say it is unclear whether they would participate in relief measures provided by governments.

The Chinese Ministry of Foreign Affairs didn’t respond to a request for comment.

Failure to resolve this accelerating crisis, United Nations Secretary-General António Guterres warned this month, could result in “a situation in which a series of countries in insolvency might trigger a global depression.”

The number of countries looking to multilateral agencies for support and running into legal disputes with creditors could make this the worst emerging-market debt crisis since the 1930s at least, said Kenneth Rogoff, chief economist of the IMF from 2001 to 2003 and now a Harvard University professor.

“They can’t handle that—the New York and London courts can’t, the IMF can’t,” he said. “It is a case of too many patients coming to the hospital at once.”

The IMF says more than 100 countries have come to it for help to fund their coronavirus battle since March. Of the total $250 billion of financing the IMF has committed, about one-third was approved in just the past four months.

The financial crisis is exacerbating humanitarian disasters in many nations, threatening to set back decades of gains in health care, nutrition and education, aid agencies say. Debt-relief advocacy groups like the Jubilee Debt Campaign say they worry that emergency funding meant to bolster governments’ coronavirus responses is instead paying off foreign debts.

At least 6.9 million of Zambia’s 17.4 million citizens don’t have sufficient food, up 290,000 from three months ago, according to the World Food Programme. The country, which had recorded 4,481 cases of Covid-19 as of July 26, has just six laboratories that can test for the disease.

‘Debt Trap’

The lack of preparedness for the pandemic’s financial impact traces to First World efforts 15 years ago to help wipe out the developing world’s debt. With proponents ranging from then-President George W. Bush to rock band U2’s star Bono, rich nations and multilateral lenders like the World Bank forgave $125 billion in the early 2000s to end what was called a “debt trap”—in which nations spend more on interest than health, infrastructure and education.

The programs—the Heavily Indebted Poor Countries Initiative and the Multilateral Debt Relief Initiative—aimed to wean poor nations off the IMF, World Bank and Western governments.

Those institutions, the argument went, would teach developing countries how to borrow directly from financial markets; international investors would supply more funds than multilateral agencies could and force financial discipline.

Donor countries and organizations fanned out to give technical assistance on bond markets. The U.S. paid for countries to secure credit ratings. Wall Street banks saw an opening to new markets offering better returns than the ultralow interest rates in the West.

Many countries that borrowed had weak institutions and little record in implementing economic reforms. But competition to underwrite the bonds was so fierce that some of the poorest countries paid negligible fees, according to investment bankers in the region.

Caleb Fundanga, a retired Zambian central-bank governor who left in 2011, recalls bankers swarming him at annual meetings the IMF organized in Washington, D.C. “We were telling them that we were not ready to go into the market,” he said.

But, bolstered by a booming economy, Zambia decided to go all-in. The price of its main resource, copper, was soaring, thanks to Chinese demand. To fund a revamp of its railway to better ship the landlocked nation’s metal to ports, and other infrastructure projects, Zambia offered its first-ever foreign-currency bond in 2012.

Donor funding helped it secure a bond rating several notches below investment grade. Demand for the bond—underwritten by Barclays PLC and Deutsche Bank AG —was so strong the yield came in below the target at 5.625%, less than what Spain paid at the time.

As orders piled up on the day of the offering, Zambia’s then-finance minister, Alexander Chikwanda, said the president, his late nephew Michael Sata, urged him to increase the offering’s size. “I explained to him that the debt servicing would be a problem,” Mr. Chikwanda said, but he increased the deal to $750 million from $500 million.

The country issued two more dollar bonds in the next three years, raising a total of $3 billion supposed to finance roads, power grids and other infrastructure at much higher interest rates.

“There was a lot of money from the West that could be accessed with very little conditionality,” said Shebo Nalishebo, who was an analyst for a government-funded think tank advising the finance ministry at the time.

Charles Russon, chief executive for corporate and investment banking at ABSA Group Ltd., which owns Barclays’ former African operations, said the Zambian bonds were assessed to be in the best interest of the country when they were issued, but that “in hindsight now it looks a little more challenging.”

Deutsche Bank declined to comment.

Zambia also started borrowing heavily from China as part of Beijing’s Belt and Road program, plowing billions of dollars into roads, power plants and airports and signing loan agreements for many years to come. Zambia doesn’t disclose how much it owes to Beijing, but President Edgar Lungu this month asked Chinese President Xi Jinping to cancel some of the debt, according to a statement issued by his office.

Deteriorating Fortunes

Soon the country’s fortunes deteriorated. An economic slowdown in China mid-decade halved the price of copper, shrinking dollar revenue needed to help support bond payments.

Zambia’s currency, the kwacha, has dropped from around five to the dollar in 2012 to around 18 today, so the country would now have to pay back more than three times what it borrowed in local currency terms, leaving aside interest. The government says its total external debt stood at $11.2 billion at the end of 2019.

Disagreements over the size of this debt, which the IMF has said was already at $11.3 billion at the end of 2018, have stopped the fund from coming to its help. The IMF said this month that it is continuing talks with Zambian officials on how to ensure debt sustainability.

Similar patterns were emerging elsewhere in Africa. By the third quarter of last year, debt levels in sub-Saharan Africa’s poorest countries had jumped to over 60% of GDP on average, from 38% a decade earlier, according to the Institute of International Finance, or IIF, a financial-industry lobbying group.

Beijing keeps the terms of its programs under wraps. But estimates from the Johns Hopkins School of Advanced International Studies suggest African governments and their state-owned enterprises accumulated around $143 billion in loans from China between 2000 and 2017.

Some of those countries were left not only with heavy debt but also without some of the development gains borrowing was supposed to bring.

Zambia’s neighbor Angola raised $8 billion over the years after a debut bond in 2015 to fund upgrades to water, electricity and road networks. An advisory firm hired by the government to monitor 26 of those projects said only four were ever initiated.

With oil prices low, Angolan government revenues are now less than what is needed for debt payments. A spokesman for Angola’s finance ministry, which has pledged to repay private investors, didn’t respond to requests for comment.

As the virus spread, the Group of 20 major economies in April called on private investors to join governments in halting debt payments for some of the world’s poorest countries until the end of year.

The plan has since been paralyzed. Credit-rating firms have made clear that restructuring private-sector borrowing could count as a default. During investor calls organized by Rothschild & Co. following the G-20 announcement, some governments were eager to reassure lenders that they don’t need debt forgiveness, worried they would be cut off from future borrowing.

As yet, no eligible country has requested private-sector support, according to the IIF.

World Bank Group President David Malpass said the scale of government borrowing from new sources, like China and commercial creditors, places poor countries in new territory, adding: “It’s vitally important that all creditors participate and don’t create excuses to free ride on the others.”

Without a plan in sight, investors and governments are looking to what happens with Zambia, whose 2012 bond falls due in 2022, to chart a way for countries squeezed by debt held by private creditors and China.

“Zambia might end up being a template,” said Hans Humes, founder of New York-based Greylock Capital Management, which owns Zambian bonds.

Updated: 7-30-2020

Dollar Falls To Lowest Level In Over 2 Years While Gold, Silver, Bitcoin Continue To Shine

The dollar on Thursday dropped to its lowest level since May 2018 as the Federal Reserve said it plans to keep interest rates close to zero, and inflation hedges continue to show strength.

* The dollar’s trade-weighted index – a measure of its value relative to a basket of other dominant currencies – dropped to $93.04 Thursday afternoon.

* The last time the index traded this low was on May 15, 2018, according to TradingView.

* As the dollar weakens, gold continues to trade near its new all-time highs, reaching $1,980 on Tuesday.

* The yellow metal has gained more than 10% in July.

* Silver has rallied nearly 30% in July, trading at $23.26 at last check.

* Bitcoin, previously stuck trading in a tight range between $9,000 and $10,000 for nearly two months, followed the rallies in precious metals when it broke above $11,400 on Tuesday.

* Bitcoin has soared 53% in 2020, according to Messari.

“In the coming weeks you’ll see the dollar weakening further,” Qi Gao, a currency strategist at Scotiabank, told the Financial Times.

Updated: 8-31-2020

China’s Yuan Strengthens as Trade and Economic Concerns Fade

Relatively high interest rates, plus a broader selloff in the dollar, also buoy China’s currency.

China’s yuan has rallied to its strongest levels in more than a year, as the country’s economy continues to recover and investors grow less concerned about fresh U.S. tariffs.

On Monday, the currency traded at around 6.85 to the dollar in both the tightly controlled onshore market and freer offshore markets in Hong Kong and elsewhere, building on gains registered in the previous trading session.

“The clear outperformance by the Chinese economy versus the developed economies is favoring the yuan,” said Mansoor Mohi-uddin, chief economist at the Bank of Singapore.

Surveys released Monday showed Chinese business activity continued to expand for a sixth straight month in August.

Prospects of a calmer relationship between the U.S. and China were also boosting the yuan, Mr. Mohi-uddin said. “The markets seem to be favoring a potential change in leadership in the U.S., and they are looking through the current tensions.”

Last week senior U.S. and Chinese officials affirmed their commitment to the two countries’ phase-one trade deal.

“In August, the market has gotten a lot more comfortable with the idea that neither the U.S. nor the Chinese side has the inclinations nor the appetite to walk back on the trade deal,” said Sameer Goel, chief Asia macro strategist at Deutsche Bank.

Mr. Goel said the yuan was now in the middle of its two-year trading range against a basket of currencies. He said that meant Chinese policy makers were likely more comfortable letting the currency join a broader rally against the dollar, especially with less risk of the trade deal collapsing.

On Friday, the offshore yuan closed below 6.86 to the dollar for the first time since May 2019, according to Tullett Prebon data. As of Monday afternoon in Hong Kong, the onshore yuan had strengthened slightly further to about 6.849 per dollar, while the offshore yuan was at 6.848.

A widening gap between interest rates in the U.S. and higher rates available in China is also boosting the yuan, as investors seek higher-yielding assets. Foreign purchases of Chinese bonds hit a record in the second quarter.

The Federal Reserve’s shift in how it sets interest rates indicates the U.S. central bank has a tolerance for policy easing, said Chi Lo, senior economist for greater China at BNP Paribas Asset Management, implying a weaker dollar.

But he said China has much less need for lower interest rates. That will support the yuan, Mr. Lo said, as will a likely recovery in annual economic growth to a range of 6 to 6.5% in 2021.

Iris Pang, chief economist for Greater China at ING Bank NV in Hong Kong, said a tumbling dollar in recent weeks had helped boost the yuan.

She said China’s move on Friday to restrict artificial intelligence-related exports, in retaliation against U.S. pressure on Chinese technology companies, had fueled further gains in the currency on Monday.

“This shows that China has the room to fight back and there’s some resilience in the economy to buffer this pressure,” Ms. Pang said.

Updated: 12-20-2020

Yellen Pressed To Back Strong Dollar In Reversing Trump-Era Tone

Janet Yellen once touted the benefits of a weaker greenback for exports, but as the incoming Treasury secretary, she faces pressure to return the U.S. to a “strong-dollar” policy — and may cause trembles on Wall Street if she doesn’t.

The greenback’s tumble this year — it’s heading for the second-biggest drop in the past decade and a half — has already stoked foreign policy makers’ concerns, thanks to the competitive advantage it gives the U.S. Even a tacit endorsement of a weakening dollar could spur tensions with trading partners.

Yellen, President-elect Joe Biden’s pick for Treasury chief, if confirmed will take office about a month after her predecessor labeled two countries as currency manipulators and named 10 on a watch list for artificial interference. The moves, unveiled Dec. 16, capped a volatile period for currency commentary under President Donald Trump’s administration that heightens focus on Yellen’s approach.

The U.S. adopted a policy of favoring a “strong” dollar in 1995, marking an end to regular calls for other countries to drive their currencies higher. While the mantra did evolve from one Treasury chief to another, no administration from then until the Trump years communicated, as the president did in 2017, that the dollar was “getting too strong.”

While they sometimes did endorse a strong dollar — always from a long-term perspective — Trump and outgoing Treasury Secretary Steven Mnuchin said that a weaker currency would help American exports. Mnuchin also said an “excessively strong dollar” could have negative short-term effects on the U.S. economy.

It’s a sentiment Yellen herself has suggested she shared in the past.

As president of the Federal Reserve Bank of San Francisco in 2004, Yellen helped establish a view among investors that the U.S. central bank saw a weaker currency as a help in addressing the country’s current-account deficit. As the Fed’s chair a decade later, she continued to make that connection, saying repeatedly that dollar appreciation posed a drag for American exports.

A Biden transition spokesperson declined to comment on Yellen and dollar policy.

It’s the Treasury secretary’s job to oversee currency policy, and at least two former holders of that title have urged Yellen to make clear she doesn’t favor dollar depreciation. That’s after Mnuchin went so far as to entertain Trump’s consideration to forcibly weaken the dollar in mid-2019.

Predecessors’ Calls

“It would be unwise to appear actively devaluationist or indifferent to the dollar,” Larry Summers, who was Treasury secretary under Bill Clinton and national economic adviser under Barack Obama, said last month.

Summers highlighted that the dollar’s dominant role in the global financial system puts the onus on the Treasury to manage its responsibilities carefully. Favoring a strong dollar is “prudent” for the incoming secretary, in particular given Biden’s plans for “expansionary policy,” said Summers, who is a paid contributor to Bloomberg.

Hank Paulson, who served as Treasury secretary under George W. Bush, made the same point in a Wall Street Journal opinon column this month.

“Interest rates are at historic lows, and the federal debt is larger as a share of the economy than at any time since the end of World War II,” Paulson wrote. “It is critically important to bend down the steep trajectory of the rising national debt. Otherwise, the dollar will eventually be debased. Washington won’t be able to pay its bills.”

Those aren’t the kinds of concerns Yellen needed to focus on during her tenure at the Fed, which began in the 1990s as a board member. She instead looked at how the exchange rate factored into the economic outlook, and what the implications were for setting monetary policy. The following comments illustrate a consistent take over time:

* “We have a huge current account deficit, and that is a drain on demand in our economy. A lower dollar ultimately should feed through into more demand,” Yellen said in September 2004.

* The drop in the dollar from 2002 “will help to improve our gaping trade deficit and thereby offset some of the otherwise contractionary effects of the tighter credit conditions,” Yellen said in December 2007.

* “The dollar has strengthened quite a lot over the last year and a half,” Yellen told lawmakers in December 2015. “The strength of the dollar is one factor that puts — means that monetary policy for the U.S. is more likely to follow a gradual path.”

* “A stronger dollar does have a depressing effect. It creates channels through which domestic demand is depressed. At the moment, net exports — well, for quite some time and probably going forward, they will be somewhat of a drag on U.S. growth,” Yellen said in June 2016.

“Yellen as a Fed person can talk about the benefits of a weaker dollar with regard to inflation and exports,” said Brad Bechtel, global head of foreign exchange at Jefferies LLC. “But as a Treasury secretary the typical stance is a strong dollar policy.”

The dollar’s exchange rate has been set by the market since the 1970s, and official comments don’t tend to have more than a fleeting impact on the greenback, but they are still viewed closely by overseas policy makers along with investors.

The new administration’s pronouncements will be keenly eyed after the Mnuchin Treasury’s latest report on overseas foreign-exchange practices. For a quarter century, the U.S. held off on declaring any trading partner as a manipulator of its currency.

Mnuchin applied that label three times — for China from August 2019 to January, and, in Wednesday’s announcement, for Switzerland and Vietnam.

Manipulator Tag

Switzerland’s central bank quickly rebuffed Mnuchin’s demand for it to scale back intervention in the franc. Taiwan, which is on the so-called monitoring list, said the Treasury inaccurately represented its foreign-exchange purchases.

On that score, Yellen has previously indicated a more understanding view of exchange-rate movements. In 2019, she said, “It’s really difficult and treacherous to define when a country is gaming its currency to gain trade advantages.”

“She will likely advocate a high hurdle both to express and implement an active dollar policy and also to be cautious in accusing trade partners of currency manipulation,” Daniel Hui, a JPMorgan Chase & Co. global foreign-exchange strategist, wrote in a Dec. 14 report.

Regardless of whether she actively returns the U.S. to a strong dollar policy or tries to shy away from any comments, Yellen is seen bringing stability and predictability to any comments on the $6.6 trillion-a-day currency market. She underscored the importance of message discipline when, as Fed chair, she called on her colleagues in 2014 to be mindful of what they said about the dollar and highlighted that it’s the Treasury that speaks for the U.S. government on the currency.

“By longstanding agreement, the Treasury speaks for the U.S. government on international economic policy and the dollar,” Yellen observed in the late-October 2014 Fed policy meeting.

More than six years later, that’s just the role she’ll be expected to take on.

Updated: 1-5-2021

Dollar Slumps As U.S. Inflation Expectations Rise And Oil Surges

The dollar fell against all its major developed-market peers Tuesday as a decision by major oil exporting countries to curb supply helped to lift crude, stocks rebounded and U.S. inflation expectations climbed.

A move by West Texas crude above $50 a barrel helped to trigger a deeper selloff in the greenback, with the Australian dollar and other commodity-related currencies gaining the most. The Bloomberg Dollar Spot Index extended its decline to as much as 0.6%, taking it close to the nearly three-year low it touched on Monday.

The U.S. currency was already under pressure as traders focused on the outcome of two key Senate elections in Georgia that will determine whether Democrats can take unified control of government. Polls there are due to close at 7 p.m. New York time, although final results may take days to determine.

“A Blue Wave sweep would most likely be dollar-negative due to increased stimulus, debt issuance,” said Win Thin, global head of currency strategy at Brown Brothers Harriman & Co. He also noted that increasing coronavirus case numbers in the U.S. are also weighing on the dollar.

Concerns about inflation were clearly evident in the bond market, which saw the breakeven rate on 10-year Treasuries rise as high as 2.0455%, the highest level since November 2018. The Institute for Supply Management’s gauge of prices paid for manufacturing materials, which came in higher than expected, also gave a boost to the inflation outlook.

* The Australian dollar led gains, rising as much as 1.5% to 77.78 U.S. cents, the strongest since 2018, while the New Zealand and Norwegian currencies also surged

* The euro was up as much as 0.5% to $1.2306

* The yen, although often seen as a haven, also gained versus the greenback, appreciating to 102.61 per dollar, the strongest since March

Updated: 2-20-2021

Cryptocurrencies Here To Stay As Serious Asset Class, Bitcoin Making Progress To Replace Dollar

Morgan Stanley’s chief global strategist says that “regardless of where the price of bitcoin goes next, cryptocurrencies are here to stay as a serious asset class.” He added that bitcoin is making progress towards replacing the dollar as a medium of exchange.

Morgan Stanley Bullish On Bitcoin And Cryptocurrencies


Morgan Stanley’s head of emerging markets and chief global strategist, Ruchir Sharma, published a report entitled “Why Crypto Is Coming Out of the Shadows” on the Morgan Stanley website last week.

“Despite the jitters natural in a global pandemic, cryptocurrencies are rapidly gaining popular support as alternatives to gold (a store of value) and the dollar (as a means of payment),” he began. The strategist elaborated:

We see fundamental reasons to believe that — regardless of where the price of bitcoin goes next — cryptocurrencies are here to stay as a serious asset class.

Sharma explained that one reason “is growing distrust in fiat currencies, thanks to massive money printing by central banks.” Another reason is “generational,” as young people view cryptocurrency as an improvement over metal coins. He continued: “The worst knock on cryptocurrency as a store of value is its volatility, but unflinching demand from millennials has helped lower the volatility of bitcoin, even during the pandemic.”

The strategist added that this age group believes “the open-source software behind Bitcoin makes it more transparent, transferrable and trustworthy than paper money printed by governments.” He emphasized that “this crypto-confidence may reach even deeper in emerging markets, where distrust in centralized authority runs high.” Sharma opined:

Governments have been slow to recognize this evolution … Bitcoin is also starting to make progress on its ambition to replace the dollar as a medium of exchange.

When the pandemic hit, the dollar was the world’s preferred reserve currency. However, “led by the Fed, every major central bank has been printing money madly to keep economies afloat during the pandemic, undermining confidence in all national currencies,” he described, adding that 20% of “all dollars in circulation were printed in 2020, and that binge was a huge boost to the appeal of bitcoin.”

The Morgan Stanley Strategist Detailed:

Today, virtually all bitcoins are held as an investment, not used to pay bills, but that is changing.

“Last year popular payment platforms started accepting bitcoin and other digital currencies, a major step forward in their campaign to challenge the dollar,” he concluded.

Updated: 3-28-2021

House Prices Are Inflating Around The World

Pandemic-related stimulus, ultralow rates and changes in buyer behavior are turbocharging markets from Europe to Asia.

As the U.S. housing market booms, a parallel rise in residential real-estate prices across the world from Amsterdam to Auckland is raising fears of possible bubbles and prompting some governments to intervene to prevent their markets from overheating.

Policy makers were already worried about high property prices in parts of Europe, Asia and Canada before the pandemic, especially as years of low interest rates kept demand strong.

But now the trillions of dollars of stimulus deployed world-wide to fight the effects of Covid-19, along with changes in buying patterns as more people work from home, are turbocharging markets further.

That is putting policy makers in a bind. Many want to keep interest rates low to sustain the post-pandemic recovery, but they worry about people taking on too much debt to buy houses whose prices could stagnate or fall later. Other tools they have to cool demand, like tighter mortgage restrictions, aren’t always working, or are being postponed as authorities try to ensure broader economic growth stays on track.

The Danish central bank recently warned that cheap financing and savings that expanded during the pandemic could lead to people taking on more debt to purchase houses and property prices spiraling upward.

“It is clear that rising [house] prices of between 5% and 10% annually, depending on the market we are talking about, are not sustainable in the long run,” said Karsten Biltoft, assistant governor at the central bank.

In China, regulators have tried tamping down property markets to cool what one senior banking official referred to as a “bubble,” to little avail.

Property prices are up 16% over the past year in the city of Shenzhen, for example. In New Zealand, authorities recently tightened mortgage lending standards, with median home prices climbing 23% in February from a year earlier to a record.

In Sydney, where property prices also recently hit records, new mortgage demand is so high that some banks are struggling to keep up, said Christian Stevens, senior credit adviser at mortgage brokerage Shore Financial. Turnaround times for processing mortgage applications have increased from a few days to more than a month in some cases.

“It’s crazy,” he said. “We’ve never been this busy or seen this much inquiry. And it doesn’t look like it’s slowing down anytime soon.”

In the 37 wealthy countries that make up the Organization for Economic Cooperation and Development, home prices hit a record in the third quarter of 2020, according to OECD data. Prices rose almost 5% on the year, the fastest in nearly 20 years.

The U.S. has also seen strong house price appreciation, though economists generally aren’t too worried. Compared with previous periods of housing-market exuberance, buyers have higher credit ratings and are putting down more cash upfront on purchases.

Economists see similar silver linings elsewhere, making a replay of the global 2008 housing crash, which sent the world into recession, unlikely. Hot markets could cool naturally without wider damage as interest rates rise and pent-up demand is met.

As in the U.S., much of the buying globally is being driven by real demand rather than speculation, with families looking to upgrade to larger properties in suburban areas as they work more from home.

“There’s been this almost global reset as people have taken a step back during lockdown periods and reassessed their lifestyle,” said Kate Everett-Allen, head of international residential research at Knight Frank.

Strong home-price appreciation also makes homeowners feel wealthier and encourages more spending and construction, as developers build more supply.

However, with equities prices also at or near record highs, some officials are worried that vast amounts of stimulus are pushing asset prices to unsustainable levels in some global cities, which could lead to local market corrections.

The Dutch central bank told The Wall Street Journal that one concern is that sharp property price increases could be forcing households to take on excessive risk to finance home purchases. Prices in the Netherlands, where there is also a housing supply crunch, rose 7.8% last year, after a 6.9% rise in 2019, according to analysts at ING Groep.

Canada’s central bank governor, Tiff Macklem, said in February there were early signs of “excess exuberance” in the Canadian housing market, with prices up 17% on an adjusted basis over a one-year period, according to the Canadian Real Estate Association.

Mr. Macklem said officials would be monitoring the situation closely, but dismissed taking measures to rein in sales, saying the economy needed all the support it could get.

Governments say they are also worried about pricing more families out of the market, which could exacerbate economic imbalances that have worsened during the pandemic and potentially drive younger people to put off having children.

In Seoul, where house prices at one point last year were up nearly 15% on an annualized basis, some couples are postponing registering marriages in the hope of making it easier to buy homes. Income thresholds for low-interest mortgages in South Korea are more generous for individuals than couples.

In New Zealand, Sam Hindle, 29, says he and his wife bid on six houses and were rejected for all of them because of competition from other buyers, and eventually agreed to buy a house off-market from a friend.

“It’s just been a nightmare,” said Mr. Hindle, who works in a bank call center and lives about a four-hour drive from Auckland.

Government officials recently told New Zealand’s central bank that it must consider the impact its policy decisions have on housing, though doing so could complicate rate-setting. The central bank also restricted the volume of high-risk mortgages banks can offer.

Last year, China put new limits on developer financing in the hope of cooling housing prices, but the market has remained frothy. In early March, the chairman of China’s main banking regulator said he was worried about a possible correction in home prices, which could threaten banks’ stability.

Europe’s housing prices have kept climbing despite a much bleaker economic outlook than in the U.S. or China. In part that is because governments have kept supporting families with salary subsidies and moratoriums on loan repayments. It is also because interest rates remain extraordinarily low, with mortgage rates averaging 1.35% across the eurozone.

In Denmark, mortgage holders have been able to borrow money at negative interest, meaning borrowers only pay the bank an administration fee. Negative interest in their favor either gets discounted from the fee or deducted from their mortgage principal.

Michael Stausholm, a Copenhagen real-estate agent, said he has sold 45 homes in less than three months this year, putting him on track to beat last year’s record of 161 sales, despite Covid-19 restrictions.

“A lot of people want to put their money in brick,” Mr. Stausholm said.

Pre-pandemic, the Dutch central bank ruled that banks would need to hold more capital to cover potential losses in mortgage-loan portfolios, but implementation was postponed because of Covid-19. The central bank has also called for the government to gradually phase out tax incentives for homeowners, including mortgage-interest deductions.

Mick ten Bosch, a real-estate agency owner in Amsterdam, said he had 450 people trying to view one house last year, compared with an average of 20 pre-pandemic. This year is even busier, with houses selling for 15% to 20% above asking price, he added.

Teun Kraaij, a 34-year-old entrepreneur, bought a house in an area by the beach near Amsterdam with more space for his two children. While he had enough money to pay the full purchase price outright, his banker advised him to take a mortgage with a 1.2% interest rate.

“It’s so cheap to borrow money nowadays, it doesn’t make sense not to do it,” Mr. Kraaij said.

Updated: 4-12-2021

White House Warns Of Inflation Hitting Consumers Wallets/Purses

The White House said inflation is likely to settle back down after a temporary acceleration in the next few months, as the Biden administration seeks to address Republican criticism that its stimulus plans will overheat the economy.

Annual inflation is likely to rise in the coming months because of comparisons with year-earlier figures, supply-chain disruptions and pent-up demand for services, according to a blog post Monday by Jared Bernstein, a member of the Council of Economic Advisers, and Ernie Tedeschi, a senior CEA economist.

Price gains will “fade back to a lower pace thereafter as actual inflation begins to run more in line with longer-run expectations,” they wrote.

The blog post aims to give a more detailed explanation of why inflation pressures are likely to dissipate after top officials including Treasury Secretary Janet Yellen repeatedly said there’s no reason for any significant concern about prices. The White House outlook is in line with the views of Federal Reserve officials and the median of private forecasts collected by Bloomberg News.

“Such a transitory rise in inflation would be consistent with some prior episodes in American history coming out of a pandemic or when the labor market has quickly shifted, such as demobilization from wars,” Bernstein and Tedeschi wrote. “We will, however, carefully monitor both actual price changes and inflation expectations for any signs of unexpected price pressures that might arise as America leaves the pandemic behind and enters the next economic expansion.”

Some Republicans have attacked President Joe Biden’s $1.9 trillion coronavirus-relief bill passed last month and the proposed $2.25 trillion infrastructure and jobs plan as likely to boost inflation to undesirable levels, amid extra borrowing.

Larry Summers, a former Treasury Secretary and top Obama administration economic adviser, has also said that Biden risked triggering high inflation by pumping too much money into the economy just as it’s poised to pick up steam.

The White House said inflation is likely to settle back down after a temporary acceleration in the next few months, as the Biden administration seeks to address Republican criticism that its stimulus plans will overheat the economy.

Annual inflation is likely to rise in the coming months because of comparisons with year-earlier figures, supply-chain disruptions and pent-up demand for services, according to a blog post Monday by Jared Bernstein, a member of the Council of Economic Advisers, and Ernie Tedeschi, a senior CEA economist.

Price gains will “fade back to a lower pace thereafter as actual inflation begins to run more in line with longer-run expectations,” they wrote.

The blog post aims to give a more detailed explanation of why inflation pressures are likely to dissipate after top officials including Treasury Secretary Janet Yellen repeatedly said there’s no reason for any significant concern about prices. The White House outlook is in line with the views of Federal Reserve officials and the median of private forecasts collected by Bloomberg News.

“Such a transitory rise in inflation would be consistent with some prior episodes in American history coming out of a pandemic or when the labor market has quickly shifted, such as demobilization from wars,” Bernstein and Tedeschi wrote. “We will, however, carefully monitor both actual price changes and inflation expectations for any signs of unexpected price pressures that might arise as America leaves the pandemic behind and enters the next economic expansion.”

Some Republicans have attacked President Joe Biden’s $1.9 trillion coronavirus-relief bill passed last month and the proposed $2.25 trillion infrastructure and jobs plan as likely to boost inflation to undesirable levels, amid extra borrowing.

Larry Summers, a former Treasury Secretary and top Obama administration economic adviser, has also said that Biden risked triggering high inflation by pumping too much money into the economy just as it’s poised to pick up steam.

Raw Materials Prices Have Surged. Corporate Profits Are Likely Next

Higher input costs generally accompany broad economic growth, allowing companies to pass along added expenses and fatten margins.

Prices are surging for raw materials, leading to higher costs for companies from home builders to clothing makers.

If history repeats, that will be a boon to corporate bottom lines and investors as well.

Rising material costs usually foreshadow fatter profit margins, according to Jonathan Golub, chief U.S. equity strategist at Credit Suisse Group.

Higher input costs generally accompany broad economic growth, which allows companies to pass along added expenses through higher prices of their own. Also, fixed expenses, like factory equipment, can be spread over greater sales.

Mr. Golub tracked operating margins among companies included in the S&P 500 stock index and found rises and declines that mirror earlier moves in materials prices, for which he used an index of commodities that includes zinc, rubber, steel scrap and burlap.

Lately it has been hard to find a commodity not rising in price. Wheat, copper, wood pulp, crude oil and corn have all rebounded from the depths of last spring’s economic lockdowns.

Lumber prices have sailed more than 75% higher than the pre-pandemic record. High wood prices along with rising copper and crude oil bode especially well for corporate earnings, Mr. Golub said.

The producer-price index, a measure of the prices businesses receive for their goods and services, rose 1% in March, the Labor Department said Friday. Steel, iron, industrial chemicals, diesel and plastic resins were big gainers. The inflation measure ended March up 4.2% from a year earlier, the biggest 12-month gain in a decade.

Scott Colyer, chief executive of Advisors Asset Management, which manages $38 billion, said he believes commodity prices and in turn the price of manufactured goods have room to run, thanks to fiscal and monetary stimulus from governments aiming to soften the blow of pandemic lockdowns and revive their economies.

Meanwhile, scarcity of some materials and snarled supply lines have purchasing managers stockpiling the materials their companies need to do business, which adds more demand.

“There is a point where the system will not tolerate increases, but we’re not in one of those places today at all,” Mr. Colyer said. “Things are lined up where this should be a pretty good party.”

The frenzied pandemic housing market has allowed home builders and their suppliers, like Sherwin-Williams Co. and door maker Masonite International Corp. , to counteract rising costs with higher prices without losing customers. Consumer-product firms have followed suit.

Companies including Levi Strauss & Co., Corona brewer Constellation Brands Inc. and Conagra Brands Inc., the packaged-food company behind Vlasic pickles and Reddi-wip, have told investors they are pushing prices higher in response to more costly raw materials.

“History shows us that price adjustments are more likely to be accepted in the market when industrywide and broad-based input cost inflation occurs, and that’s the environment we see today,” Conagra finance chief David Marberger told investors last week.

With Economy Poised For Best Growth Since 1983, Inflation Lurks

Federal stimulus and Covid-19 vaccinations have led to boosts in outlook for GDP and consumer prices in survey of economists.

Ronald Reagan was in the White House, “Return of the Jedi” was in theaters, and economic growth hit an astonishing 7.9%.

The U.S. has produced many more Star Wars films since 1983, but growth has never approached that level—until this year, if economists are right. Those surveyed by The Wall Street Journal boosted their average forecast for 2021 economic growth to 6.4%, measured as the change in inflation-adjusted gross domestic product in the fourth quarter from a year earlier. If realized, that would be one of the few times in 70 years that the economy has grown so fast.

“We had an incredible shock, but look how fast we’re bouncing back,” said Allen Sinai, chief global economist and strategist at Decision Economics Inc. “We’re in the early stages of recovery, and we’ve got three to five years to go. I think we’re going to end up in a boom.”

Economists expect growth to slow to 3.2% next year, which would still make 2021-22 the strongest two-year performance since 2005.

That boom might have a potentially troubling side effect. Inflation, as measured by the consumer-price index, is expected to jump sharply from 1.7% in February when March data is released Tuesday. That is partly a quirk of the data, as outright declines in consumer prices recorded at the start of the pandemic in March of last year drop from the 12-month calculation.

Still, economists see further price pressures as the economy reopens, with inflation accelerating to 3% in June, which would be the highest since 2012, before slowing to 2.6% by December. They see the Federal Reserve starting to raise rates in mid-2023, rather than 2024 or later, as officials at the central bank have indicated.

The Wall Street Journal survey of 69 business, academic and financial forecasters was conducted April 5-7. Not all participants responded to every question.

As recently as December, economists expected solid but unspectacular growth of 3.7% this year, reflecting the reversal of pandemic-induced shutdowns as well as the Fed’s low interest rates. Then, in the waning months of the Trump administration, the federal government authorized two Covid-19 vaccines, and Congress passed a $900 billion coronavirus relief package.

About a third of Americans have now received at least one shot, according to the Centers for Disease Control and Prevention, and Congress has approved another $1.9 trillion in fiscal support. On March 31, President Biden unveiled an infrastructure investment plan to be partly financed by higher corporate taxes.

“Both in terms of magnitude and timing, that was a bigger jolt to the economy than anticipated,” said Michelle Meyer, head of U.S. economics at BofA Global Research, referring to fiscal stimulus. “Another very important factor is the vaccination campaign, which is happening faster than anticipated.”

Economists in the survey on average now expect employers to add 7.1 million jobs in 2021, which would be the largest December-to-December gain on record and up sharply from 4.9 million projected in the survey late last year. At 5%, the increase would be the largest since 1978. The unemployment rate is expected to fall to 4.8% by year-end, compared with a projection of 5.6% late last year.

The outlook remains highly uncertain. In the past year, economists have alternated between excessive optimism and pessimism. Vaccine hesitancy, faster-spreading virus variants or the potential drag from a lagging overseas economy could yet undercut growth this year.

Growth of 6% or better was more common before the 1980s, when underlying growth was higher and usually came right after recessions with the help of loose monetary and fiscal policy. The contraction in output in the first half of last year was far more severe than any previous recession, so a strong recovery was partly inevitable. Indeed, GDP rebounded strongly in the third quarter of last year.

The scale of federal stimulus is greater than in the previous recoveries, at nearly $6 trillion, or more than one-quarter of annual GDP. Mr. Reagan’s combination of tax cuts and military spending was spread out over a longer period, said Mr. Sinai. “It makes it hard for a forecaster because I’ve not seen anything like this, ever,” he said.

That stimulus has significantly boosted federal debt, which some warn could eventually raise interest rates sharply. Still, economists see the 10-year Treasury note yield rising only slowly from 1.66% on Friday to around 1.9% by the end of this year and 2.5% by the end of 2023, still lower than in 2018.

A hot economy could also bring the bugbear of inflation. Its path depends heavily on how easily surging demand can be met with increased production.

“How does it shake out? Well, no one knows because no one has seen such an experiment before—it’s like spending as much money to fight World War II except there’s no enemy, we’re not spending it on defense, and it’s not clear who will buy what,” said James F. Smith, macroeconomist at EconForecaster LLC. “If the overwhelming majority of our demand goes to domestically produced goods and services, we’re going to see bottlenecks like we’ve never seen before.” More likely, though, some of that U.S. demand will go toward goods and services from abroad, keeping prices in check, Mr. Smith said.

The Fed’s 2% inflation target is based on the price index of personal-consumption expenditures, which economists expect to advance from 1.6% in February to 2.5% by the fourth quarter, and remain above 2% through 2023. That is slightly higher than Fed officials themselves expect. The central bank has said it would start to raise rates when inflation reaches 2% and is headed higher and when full employment has been achieved.

This year’s unusually torrid projected growth might be powered not just by a return to pre-Covid-19 normalcy but also by technological, structural and policy changes that could boost growth potential beyond 2021, said Ms. Meyer.

“We went through so much pain as a society around Covid, and there were so many lives lost,” she said. “But in a way the economy was put into hibernation for a period of time, supported by stimulus.” In the intervening time, she added, firms invested in new technologies and rethought workforce management in ways that could boost productivity and labor-force participation. “The economy has now, in a sense, reset,” she said.

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