Ultimate Resource On A Weak / Strong Dollar’s Impact On Bitcoin
Bitcoin Dips As US Dollar Surge Dampens BTC Price Performance. Ultimate Resource On A Strong Dollar’s Impact On Bitcoin
Still The King, The U.S. Dollar Throws Shade At Currency Weaklings
Despite a strengthening yuan, the world isn’t close to abandoning the greenback.
The premise that the dollar is the world’s safe haven is a constant in this ever-changing world. It’s certainly proving true this year.
Both increase pressure on the Federal Reserve to bring forward interest-rate hikes, in turn raising the relative attractiveness of the dollar.
The currency market rule of thumb with a stronger greenback is that it hurts economies — particularly in fragile emerging markets — that are reliant on commodity imports priced in dollars. The flipside of this is that commodity and hydrocarbon-exporting economies receive a foreign exchange boost.
But big exporting powerhouses such as the European Union and Japan also benefit when their currencies are relatively cheaper to the dollar. The European Central Bank is certainly not protesting the slow, steady weakness of the euro as it tries to recover from the pandemic.
It’s a little more complex for the U.S. economy: Despite a huge embedded trade deficit, the economic impact is somewhat offset by the dollar being the world’s reserve currency. The Fed avoids giving any views on the value of the dollar when setting interest rate policy.
But its unwavering dovishness on keeping policy rates near zero and still buying tens of billions of bonds each month looks to be increasingly tough to justify. Further strong labor market reports could tip the balance.
Nothing in life is simple. So the Fed has to steer the narrow course between not leaving low rates too late and then having to overdo hikes to quash the inflation beast — or indeed withdrawing stimulus too sharply and causing a repeat of the 2013 or 2018 taper tantrums.
Former New York Fed president Bill Dudley believes the Fed has left it too late and is between a rock and a hard place but the 10-year U.S. Treasury yield at 1.6% shows the bond market is still a believer in the central bank’s skillsets.
The recent consumer price index increase of 6.2% is a clear-and-present danger: If this miles-above-target inflation persists, it will only hasten the Federal Open Market Committee’s timing in bringing its QE taper to a swifter conclusion.
A stronger-than-expected October non-farm payroll release just lends weight to the premise that the economy is recovering faster from the pandemic, fueled by yet more multi-trillion dollar fiscal stimulus programs and a Fed balance sheet fast approaching $9 trillion.
It’s not hard to conclude this may well bring forward the first rate hike.
Higher yields will make the dollar more attractive. Increased global uncertainty just speeds it up. U.S. growth doesn’t have to be the best in the world, just among the best. Its size alone will carry the dollar along nicely.
This does not mean the dollar is cheap. It can be frustrating watching expensive things just get richer. But improving economic conditions and yet more fiscal stimulus in the U.S. mean there are further reasons to eschew the paltry yields available in Europe and Japan for the bright lights stateside.
No examination of the dollar is complete without reference to China. The yuan has strengthened steadily versus the dollar over the past 18 months. Chinese exports have risen impressively but the overall economic picture is of weakening growth.
So be under no illusion that yuan strength is anything other than a carefully controlled affair. Beijing is focused on the dual task of boosting domestic consumer demand while limiting the damage from a credit explosion in its out-of-control real estate market.
A strong yuan also has the benefit of lessening the impact of higher commodity prices onto its producers as well as reducing the cost of stockpiling basic resources.
To mitigate some of the impact of outrunning the stronger dollar, China has been steadily reducing the greenback’s share in the weighted currency basket that it uses to set the yuan’s daily reference rate.
Furthermore it has been allowing substantially more foreign capital to invest in its domestic equity and bond markets. Overseas investors hold 2.3 trillion yuan ($360 billion) of Chinese government bonds attracted by substantially higher yields.
For stock market funds, it is a chance to gain wider exposure to the second-largest economy. But, at some point, the Chinese authorities will decide that propping up its currency has served its purpose and allow the yuan to naturally weaken — adding another medium-term reason to own the dollar. A currency with capital controls is strictly for the brave.
There still really isn’t much to beat the dollar’s current appeal with the S&P 500 powering to yet more record highs. A boom economy, the FOMO-driven stock market and the prospect of rate hikes not so far away makes the U.S. currency a pretty comfortable place to sit it out the many troubles around the world.
It helps also that the Fed is no longer supporting the global economy by flooding the world with dollars as it did at the height of the pandemic. For now it’s the no-brainer trade, at least until the next U.S.-led downturn or some Fed mistake.
Bitcoin Price Briefly Drops Below $60,000 As Strong Dollar Weighs On Crypto
After last week’s rally, some cryptocurrencies fall more than 10% from recent highs.
Cryptocurrencies slid in overnight trading, with some of the most popular digital tokens losing more than 10% from recent highs. Some investors pointed to the stronger dollar as a catalyst for the fall.
Bitcoin briefly fell below $59,000 on Tuesday, tumbling to its lowest price this month, before edging up to trade around $60,550.
The selloff began Monday and extended into a second day, with the digital asset down more than 5% since Monday at 5 p.m. ET. Ether slid for a fifth consecutive day, also declining another 7% to around $4,260. It is down more than 10% from its latest record.
“A lot of people view crypto as a risk-on investment,” said Martha Reyes, head of research at Bequant, a digital-asset brokerage and exchange. In times of stress, “people will be looking to raise cash and they will raise cash where they’ve maybe had the most profits.”
The slide comes after a rally that powered bitcoin last week to a record of $68,990.90. Cryptocurrencies received a boost from the debut of the first exchange-traded fund to hold bitcoin futures contracts, which spurred buying.
They were also caught up in a flurry of risk taking in markets, which included some of the most speculative growth stocks.
Some signs of nervousness are beginning to show in broader markets as concerns about runaway inflation rise after the biggest uptick in consumer prices in the U.S. in more than three decades.
Covid-19 cases are also beginning to pick up in the Northern Hemisphere as winter approaches, with some European countries tightening restrictions.
Traditional safe-haven assets such as the dollar and gold have rallied. The WSJ Dollar Index, which measures the greenback against a basket of currencies, reached its highest level since July 2020 Tuesday.
The dollar’s strength also indicates investors continue to bet that the Federal Reserve may have to raise interest rates to deal with inflation, according to researchers at Capital Economics.
Higher rates would attract yield-seeking capital flows to the U.S. The researchers expect the dollar to keep appreciating through next year.
This matters for cryptocurrencies because tighter Fed policy would weigh on the broader market and likely hit the riskiest assets hardest, said Joel Kruger, a currency strategist at LMAX Group. This is having a short-term negative impact on cryptocurrencies, he said.
Recent advances in regulation of cryptocurrencies in the two biggest economies in the world may also be weighing on the market, analysts said.
President Biden signed a $1 trillion infrastructure bill Monday. The bill includes a section on digital assets, adding similar tax-reporting rules as those for traditional securities such as stocks and bonds.
“We’ve been surprised by the pace of development in the U.S.,” said Ms. Reyes. “It would be unfortunate if it stifled innovation too much.”
China’s economic planning agency on Tuesday reiterated opposition to cryptocurrency mining and laid plans for a further crackdown.
It said it had told local authorities last week to “completely clean out mining activities” in their regions.
Computer labs at state-owned enterprises would be inspected and punished if they were engaged in mining, Meng Wei, a spokeswoman for the National Reform and Development Commission, told a news conference.
The next step would be to target cryptocurrency-mining activities being conducted on an industrial scale and state-owned companies involved in the industry, Ms. Meng said. Punitive charges would be levied on groups that mine crypto using power bought at residential electricity prices, she said.
Dollar Rises To Highest Level Since July 2020 After U.S. Data
* Bloomberg Dollar Index Has Gained More Than 2% This Month
* Biden’s Fed Picks Have Given U.S. Rates, Greenback A Boost
The dollar surged to its strongest level in more than a year, driven by a climb in Treasury yields this week following U.S. President Joe Biden’s decision to renominate Jerome Powell as head of the Federal Reserve.
The Bloomberg Dollar Spot Index was up as much as 0.5% after a swath of U.S. economic data was released Wednesday, including figures that showed jobless claims at the lowest level in decades. The move pushed the greenback index to a level last seen in July 2020.
The gauge has added more than 2% this month as concerns about rising inflation have spurred bets on tighter Fed policy. The dollar has strengthened against all but two of 16 major currencies tracked by Bloomberg, as threats ranging from Covid to soaring inflation loom around the world.
“We have a nice perfect storm for the USD higher,” said Brad Bechtel, global head of foreign exchange at Jefferies. “You have an element of U.S. outperforming the rest of the world, which will drive U.S. rates higher, as well as an element of safe-haven demand for dollars as emerging markets continue to see their currencies melt down and Covid rates spark new concerns on growth in the Eurozone.”
Traders are watching progress in the labor market for clues on the Fed’s policy path, as Powell has emphasized such progress is a key condition for tightening monetary conditions in the world’s largest economy.
JPMorgan Chase & Co. strategists led by Paul Meggyesi forecast a stronger greenback next year as Fed rate hikes approach, they wrote in a report Tuesday.
The greenback gained about 1.1% against the New Zealand dollar, the day’s biggest loser among Group-of-10 currencies, after the New Zealand central bank raised its benchmark rate by a quarter point as forecast, but disappointed some hawks by saying it would take a cautious approach to further tightening.
Investors Are Most Bullish On Dollar Since 2015, BofA Says
Investors’ dollar positioning and views are the most bullish since 2015, buttressed by expectation the Federal Reserve’s hawkish pivot will translate into higher rates, according to a Bank of America Corp. survey.
A majority of respondents now expect the Fed to end its asset-purchase program in the first quarter of 2022, pulling forward expectations from the second quarter in the previous tally.
“Investors pivot on the Fed, however, continues to come with low terminal rate expectations, which is one of the reasons why the curve has flattened so meaningfully in this latest move,” strategists Ralf Preusser and Myria Kyriacou wrote.
Respondents cited central bank tightening as the biggest risk to the market in 2022, followed by inflation and peaking liquidity.
The dollar’s rally in 2021 comes ahead of any rate hikes from the central bank, with the Bloomberg Dollar Index on track for its strongest year since 2015. Conversely, most-emerging market currencies have floundered: Only three of the 24 tracked by Bloomberg have gained against the dollar.
In addition to shifting dollar bets, emerging-market currency exposure has turned negative for the first time since 2018, they wrote. The strategists said that the December Fed meeting still has room to drive both positions further, while noting that positions have already shifted and that investors have reduced some portfolio risk.
Bitcoin Dips Below $47K As US Dollar Surge Dampens BTC Price Performance
It’s not looking great for Bitcoin on short timeframes, and Ethereum is becoming an increasingly popular bet instead.
Bitcoin (BTC) crisscrossed $47,000 on Jan. 3 as the first Wall Street trading days of 2022 got off to a modest start.
Ethereum Steals The Limelight
Data from Cointelegraph Markets Pro and TradingView showed BTC/USD acting in a narrow range as the week began, with traders split over short-term outcomes.
“It’s just a matter of time before BTC breaks out, and the longer it takes, the harder it will pump,” popular Twitter account Galaxy summarized.
“Q1 is up only. You heard it here first.”
Such optimism was far from universal, however. For Cointelegraph contributor Michaël van de Poppe, the time had come to look closer at altcoins than BTC.
“Good bounce from Ethereum and I think this one is bottomed,” he said about the state of ETH/USD Monday.
“Still need additional confirmation, but shows more strength than Bitcoin at this point. Ultimate confirmation above $4,100.”
ETH/USD was up over 2% in 24 hours at the time of writing, with BTC/USD conversely showing no inclination to tackle even daily highs.
On macro markets, the S&P 500 was up a touch at the Wall Street open, amid predictions that the first half of the year would be a further boon for equities across the board thanks to the prospect of key interest rate hikes.
The U.S. dollar, meanwhile, saw a sudden boost on Jan. 3, with the U.S. dollar currency index (DXY) rapidly gaining — as is customary, to Bitcoin’s detriment.
Never Mind The Bearish Divergence
Among Bitcoin-focused analysts, meanwhile, TechDev led calls to quash bearishness, arguing that on-chain indicators do not support a bearish thesis.
Concerns about both the relative strength index (RSI) and moving average convergence/divergence (MACD) pale in comparison to more fundamental indicators still yet to print a bearish outlook, he said at the weekend.
The 2 points are valid to point out, but I don’t focus on them as they’ve not been historically accurate at identifying macro cycle trend changes.
2 that have? Macro LLs and 2W RSI floor breaks. Neither of which have happened.
If they do, my macro outlook will change. pic.twitter.com/qUedP5juZ8
— TechDev (@TechDev_52) January 3, 2022
With conviction remaining high and selling declining, TechDev was in good company.
“In case no-one noticed, we have come a long way from nerdy retail HODL’ers being the buyers of last resort,” entrepreneur Alistair Milne added.
“We now have billionaires, multinationals and countries waiting to buy the dips. Whoever is taking the other side of the trade needs their head examined IMO.”
A fresh influx of institutional interest is considered by some to be ready to begin this month.
Dethroning King Dollar Won’t Be An Easy Feat
There is no alternative to the world’s reserve currency despite any concern or wishful thinking to the contrary.
If the last dozen years or so has taught us anything about markets and the economy, it’s that anything can happen, no matter how unlikely. The U.S. housing market was considered as solid an investment as there ever was because prices never fell nationally — until the subprime crisis came along.
The idea that the European Union would ever come close to breaking apart and taking the euro with it was unthinkable — until Greece defaulted. And everyone knew that inflation like that of the late 1970s was never coming back — until the pandemic snarled supply chains worldwide.
So it’s natural that a sort of cottage industry has sprung up in the last decade or so trying to anticipate the next so-called black swan event that could upend the global economy and markets.
As my Bloomberg News colleagues Joe Weisenthal and Tracy Alloway do a good job of explaining, there is a growing concern that perhaps Russia’s invasion of Ukraine could mark the beginning of a turning point for the U.S. dollar — and not for the good.
The thinking is that the U.S. has “weaponized” the dollar through heavy financial sanctions imposed on Russia, including preventing that country’s central bank from accessing its foreign currency reserves. “As such, it may make less and less sense for global reserve managers to hold dollars for safety, given that they could be taken away right when they’re most needed,” they write.
Make no mistake, any such move away from the dollar would have earth-shattering consequences. The dollar has been the world’s reserve currency since the U.S. and its allies agreed at the 1944 Bretton Woods conference to peg it to a rate of $35 per ounce of gold. According to the International Monetary Fund, the dollar’s share of global reserves stands at 59%, far above the euro at 20.5%.
After the euro, there’s a steep drop to the No. 3 slot, which is occupied by Japan’s yen at 5.83%. As the world’s primary reserve currency, the U.S. enjoys the “exorbitant privilege” that goes along with that, such as interest rates that are lower than they might otherwise be and the government being able to fund budget deficits in perpetuity.
The dollar makes up a majority of global currency reserves, easily topping the euro, which is second.
To consider how difficult it is to come up with a viable alternative to the dollar, consider China’s yuan. (The euro doesn’t count, given how close the European Union came to breaking up over its debt crisis a decade ago. Plus, it’s more of a monetary union than a fiscal one.)
The Asian nation, which has the world’s second-largest economy after the U.S., has spent a lot of time and effort over the past decade trying to make the yuan a viable alternative to the dollar. And, yet, less than 3% of the world’s foreign-exchange reserves are denominated in yuan.
On top of that, only about 3% of global transactions are conducted in yuan, compared with 40% for the dollar, according to SWIFT, the messaging service that facilitates the vast majority of money transfers globally.
Not A Contender
The yuan accounts for a minuscule share of global payments even though China has the world’s second-largest economy.
The benefit to holding reserves in dollars is that U.S. markets are so much deeper and more liquid than any other. At $23 trillion, the U.S. Treasury market is more than double the size of Japan’s government bond market.
And even if you wanted to buy so-called JGBs, you probably couldn’t because the Bank of Japan owns a vast majority of them, so much so that no trading is done in the JGB market on some days.
As for Europe, the U.K., France, Italian and German bond markets are all less than $3 trillion in size. Foreign holdings of U.S. Treasuries have soared to $7.74 trillion from around $1 trillion at the start of the century, according to the U.S. Treasury Department.
And while America’s politics and brand of democracy can seem messy at times — especially lately — foreign investors do take comfort in the country’s strict adherence to the rule of law that draws capital from all around the world in good times and bad.
Although global foreign-direct investment flows surged 77% to an estimated $1.65 trillion in 2021, the U.S. experienced an even bigger jump of 114% to $323 billion, according to the United Nations Conference on Trade and Development.
The dollar’s share of global currency reserves has slowly eroded over the years, dropping from around 73% in 2001, but the current level is still up from the low of around 45% going back to the early 1960s.
And although the rise in cryptocurrencies offers bad actors another option to park their money out of the reach of regulators and other authorities, no country of consequence is going to attempt to park their reserves in Bitcoin. But that’s the point.
As FHN Financial economist Chris Low wrote in a research note to clients on Wednesday, as long as the world doesn’t suddenly see a string of bad actors “launch megalomaniacal attacks on their neighbors, they don’t really have to worry” about having their dollar assets frozen. “The sanctions on Russia are extraordinary because Russia’s misbehavior under (President Vladimir) Putin is extraordinary,” Low wrote.
Of course, nothing is forever, but it can sure seem like it in the foreign-exchange market. Before the dollar, the British pound was the world’s dominant currency, having held the crown throughout the 1800s until World War II. By that measure, the dollar has a long way to go before being toppled. The simple fact is, there is no alternative.
Bitcoin Drops For Third Straight Day As Dollar Hits 21-Month High, US Wages Eyed
A continued uptick in wages would imply more inflation and strengthen the case for rate hikes by the Fed.
Bitcoin (BTC) fell for the third straight day on Friday as lingering geopolitical tensions and rising oil prices pushed the U.S. dollar higher.
The leading cryptocurrency by market value was trading at $41,400 during the early European session, representing a 2.5% drop on the day. Sellers regained dominance after the cryptocurrency failed to establish a foothold above $45,000 earlier this week.
“Asian desks and high frequencies are cutting exposure on BTC while long only funds in European are selling. Brokers are also selling on behalf of clients more than usual as sentiment leaning slightly more bearish at the moment,” Laurent Kssis, a crypto exchange-traded fund (ETF) expert and director of CEC Capital, told CoinDesk in a Telegram chat.
The dollar index, which tracks the greenback’s value against majors, jumped to 98.08, the highest since June 2020, according to a chart provided by TradingView.
The haven bid for the greenback strengthened during Asian hours triggered by a flight to safety as Russian forces started shelling Europe’s largest nuclear power station in Ukraine. Asian stocks tanked to a 16-month low while oil remained in demand above $110 per barrel on both sides of the Atlantic.
Assets priced or traded in dollars typically drop when the dollar rises. According to Kevin Kelly, co-founder and global head of macro strategy at Delphi Digital, the greenback and bitcoin have a pretty inverse correlation.
“2017 was one of the worst years for the dollar, and that coincided with a huge run in bitcoin,” Kelly said in the latest weekly analyst call. “We saw bitcoin run-up in early 2021. That was on the back of the dollar weakness.”
The U.S. Labor Department’s closely watched employment report is scheduled for release at 13:30 UTC (8:30 a.m. ET). The report is expected to show that average average hourly earnings rose another 0.5% in February, pushing the year-over-year gain to 5.8%, according to Bloomberg.
The non-farm payrolls (NFP) figure is likely to show the economy added 415,000 jobs, pushing the unemployment rate down to 3.9% from 4%.
Focus On Wage Growth
While the NFP may grab headlines, the market is likely to move more on the wage growth represented by average hourly earnings.
An above-forecast wage growth may bolster inflation worries, validating the U.S. Federal Reserve’s hawkish stance. The dollar may find more buyers in that case, possibly bringing selling pressure to asset prices, including bitcoin.
According to macroeconomic theory, an uptick in wages can push up inflation. As wages rise, employers pass on the increase in labor cost to the final consumer, resulting in an uptick in the general price level in the economy. Workers demand higher wages in response, setting a vicious cycle of wage-push inflation in motion.
In recent months, the Fed has changed its stance to controlling price pressures from the dual mandate of price stability and maximum employment. U.S. inflation at the consumer level has risen to a four-decade with the ongoing Russia-Ukraine military conflict is likely to put further upward pressure on the general price levels.
On Thursday, Fed Chair Jerome Powell told lawmakers that the central bank is poised to raise rates by 25 basis points later this month and that they are prepared to do whatever it takes to control inflation, even at the expense of the economy, according to The New York Times. Markets expect the central bank to deliver five quarter percentage point rate hikes within the year.
Dollar Strength Builds As Ukraine War Deepens
The ICE U.S. Dollar index hits its highest level since May 2020 as investors dash to safer assets.
Escalating conflict between Russia and Ukraine has sent investors dashing to safer assets, propelling the dollar to its highest level since the coronavirus-induced volatility of two years ago.
The ICE U.S. Dollar index, which tracks the currency against a basket of others, surged as high as 98.92 this past week, its highest level since May 2020. It finished the week with a 2.1% jump, one of the largest in the past five years.
Investor anxiety swelled as Russia advanced across Ukraine, upending markets across the globe and sending traders scrambling for assets perceived as safer, such as gold, U.S. government bonds and the dollar. The U.S. currency in particular is often seen as the ultimate haven asset because of its status as the world’s reserve currency. In times of turmoil, traders tend to seek out dollar liquidity and dump riskier investments.
That scenario represents half of what is known as the so-called dollar smile, a market theory that posits that a strong dollar tends to emerge when the global economy sours and traders rush for safety. The other half of the smile, according to the framework, occurs when the U.S. economy is healthy compared with other countries, spurring investors to buy dollar-denominated investments.
The economic effects from the war in Ukraine, combined with the expectations that the U.S. will outperform global markets, has propelled the dollar to an unusual sweet spot, analysts say.
The recent move by the dollar builds on earlier strength that began last year amid expectations of higher interest rates in the U.S., which tend to bolster the currency as higher yields make it more attractive to investors.
But the crisis in Ukraine sent bets on the dollar into overdrive.
Concerns have mounted that the war and the sanctions inflicted by the West will ripple across the European continent, stunting growth while inflationary pressures rise. For now, investors believe the U.S. economy, in contrast, will be relatively insulated from the war, prompting bets by traders on U.S. stocks.
That divergence rippled across markets. The broader WSJ Dollar Index, which tracks the dollar against a basket of 16 currencies, closed at its highest level since July 2020, while the euro tumbled below $1.10 Friday for the first time in almost two years. The British pound lost 1.3% against the dollar for the week.
The moves came alongside broader risk-off sentiment around the globe, sending gold up 4.2% for the week and the S&P 500 down 1.3%. The pan-continental Stoxx Europe 600 index tumbled 7% to finish near its lowest level in nearly a year.
“There’s so much uncertainty that I struggle to see risk appetite improving in the near term, and that should play into the dollar’s hand,” said Craig Erlam, senior market analyst at Oanda.
A strong dollar, though, can be a double-edged sword, potentially weighing on U.S. companies that generate revenue outside the U.S. When the dollar rises, revenues in other currencies lose value. Companies in the S&P 500 generate roughly 40% of their revenue from outside the U.S., FactSet data show.
Recent history has shown evidence of an inverse correlation between the S&P 500 and the dollar. Take, for example, 2015, when the ICE U.S. Dollar Index surged 9.3% for the year amid concerns about Chinese growth, a slide in emerging-market currencies and expectations of an interest-rate increase from the U.S. Federal Reserve.
Late that year, the central bank raised interest rates for the first time in nearly a decade. The S&P 500 closed down 0.7% that year.
This time, though, things could be different, said Huw Roberts, head of analytics at Quant Insight, a data analytics firm. With economic growth potentially slowing in Europe and elsewhere, more investors may begin pouring more money into the U.S.
“At the moment, our models show that a stronger dollar is a very small positive for the S&P 500,” he said. “I think earlier in the year, there was a sense that the world could start catching up on American [stock market] exceptionalism. I think what’s happened in the last week or so is that some investors have stopped thinking about this.”
Keith Lerner, co-chief investment officer for Truist Advisory Services, is betting that demand for U.S. equities will counterbalance any downside that major indexes see as a result of a stronger dollar. His equity portfolios are currently tilted 82% for U.S. equities, he said, versus the roughly 61% allocation from his benchmark MSCI ACWI index, MSCI’s flagship global equity index.
“The closer you are to Ukraine and Russia, the more challenges you are going to have,” said Mr. Lerner, who noted that his portfolios have had a longstanding overweight tilt toward U.S. stocks. “The strong dollar is going to result in…somewhat of a hit to profits of U.S. companies, but that will be offset by the greater demand for the higher quality companies that people will pay a premium for relative to international markets.”
Bitcoin Steadies As Gold Hits $2K, US Dollar Strongest Since May 2020
Surging commodities and a strong dollar add to stock traders’ woes, with Goldman Sachs’ former CEO wondering why crypto assets are not “having a moment.”
Bitcoin (BTC) stayed near one-week lows on March 7 as a flight to safety among investors did the crypto markets no favors.
Gold, Dollar Spell Sour Times For Stocks
Data from Cointelegraph Markets Pro and TradingView showed BTC/USD bouncing at around $37,600 overnight before tracking around $1,000 higher.
The pair had faced pressure into the weekly close, resulting in its lowest levels this month amid reports that Western sanctions against Russia could expand to include an oil embargo.
An already panicky atmosphere thus fueled performance by safe-haven gold, which returned to $2,000 per ounce for the first time since August 2020 on March 7.
Coming in step was the U.S. dollar, which surged against its peers to see the U.S. dollar currency index (DXY) target 100 in a near two-year record.
Other major world currencies, such as the euro, paid the price, with EUR/USD falling below $1.09 to hit lows similarly not seen since the aftermath of the March 2020 COVID-19 crash.
“If Bitcoin was uncorrelated from the Stock Market, it would be performing the way gold has performed since December,” analyst Matthew Hyland argued in a synopsis on March 6.
“Bitcoin is correlated to the Stock Market. It has not “decoupled.’ Perhaps one day it does decouple but until it happens, you can’t conclude it has or will.”
Such a “decoupling” was arguably more needed than at any time recently as the stocks, themselves, faced a potential mixture of skyrocketing commodity prices and inflation-taming measures from governments.
Prior to the Wall Street open, S&P 500 futures were knocking on 2% declines, while Germany’s DAX was already down nearly 4%.
Ex-Goldman CEO Blankfein: Crypto Should Be “Having A Moment”
The extent of Bitcoin’s lackluster performance meanwhile even caught the attention of the traditional finance world.
Lloyd Blankfein, former CEO of Goldman Sachs, queried why crypto more broadly was not seeing larger inflows against a background of government control over money.
“Keeping an open mind about crypto, but given the inflating US dollar and the stark reminder that governments can and will under certain circumstances freeze accounts and block payments, wouldn’t you think crypto would be having a moment now? Not seeing it in the price, so far,” he tweeted on March 7.
Responding, MicroStrategy CEO Michael Saylor blamed conflicting investment profiles active in Bitcoin specifically, but forecast that the status quo would ultimately be broken and would allow it to fulfill its function as a long-term investment.
“There is a tension between conventional traders that see Bitcoin as something to buy or sell depending upon their current risk assessment & interest rate expectations, and fundamental investors that simply want to buy it all and hold forever,” he wrote.
“Over time, the HODLers will win.”
Oil Falls As Dollar Surge Offsets Plan For New Russia Sanctions
* U.S, EU And Group Of Seven To Announce New Restrictions
* API Reports Rise In Crude Stocks At Cushing, Oklahoma, Hub
Oil ended a volatile session lower as a stronger U.S. dollar offset a potentially bullish impact from plans by the U.S., European Union and Group of Seven nations to install new round of sanctions on Russia.
West Texas Intermediate fell 1.3% to close below $102 a barrel. The dollar rose after remarks by the Federal Reserve Governor Lael Brainard that the nation’s central bank would continue to tighten policy methodically and shrink its balance sheet at a rapid pace as soon as May.
A stronger dollar, which makes commodities priced in the currency less attractive, outweighed the plan from the U.S. EU, and G-7 nations to increase sanctions on Russian financial institutions and state-owned enterprises. Restrictions would also apply to all new investments in Russia.
The “U.S. dollar strength likely contributed to late day sell-off,” in the oil market, said Ryan Fitzmaurice, a commodities strategist at Rabobank.
In post-close trading, U.S. oil futures extended losses to briefly fall below $100 a barrel.
Oil rallied to the highest level since 2008 in the first quarter as Russia’s invasion disrupted supplies in an already tight market faced with roaring demand and dwindling stockpiles. The U.S. and U.K. already moved to ban Russian oil, and mounting civilian casualties in Ukraine are piling pressure on governments to take further steps against Russia.
Earlier, European Commission President Ursula Von Der Leyen said the trade bloc was working on further measures that will include sanctions on oil imports. Germany’s foreign affairs minister said the bloc will exit Russian fossil fuels, starting with coal.
“The threat of European sanctions on Russian oil remains an upside risk for crude prices despite the firm opposition in the short term from certain member states,” said Craig Erlam, senior market analyst at Oanda.
With the war in Ukraine in its second month, Russia faces allegations its troops massacred civilians in Bucha and other towns, an accusation Moscow denies.
The possibility of new curbs is offsetting the impact in the global crude market of a vast release from the U.S. Strategic Petroleum Reserves (SPR,) beginning in May, in a bid to tame prices. Other countries have said they’ll also make drawdowns.
That move has reshaped the oil futures curve, keeping a lid on nearby prices but lifting those further into the future.
“Many who were long oil got out in the last week or so on the basis that the SPR was just too much for the market to handle without some real evidence of dropping Russian crude exports,” said Scott Shelton, an energy specialist at TP ICAP Group Plc.
In one sign of tightness, Saudi Arabia raised selling prices for all regions. Saudi Aramco increased its Arab Light crude for next month’s shipments to Asia to $9.35 a barrel above the benchmark it uses, a record differential.
Many Western companies aren’t taking Russian crude, although discounted exports are going to buyers in Asia, including China and India. On Monday, commodity trader Trafigura Group offered to sell a cargo of Russia’s Urals grade at a record discount, but there were no bids.
Meanwhile, industry-funded American Petroleum Institute reported a 1.08 million barrel rise in U.S. crude stocks last week. For fuels, the group estimates gasoline inventories declined more than half a million barrels and distillates rose by almost 600,000 barrels.
Bitcoin climbs Above $41K On Wall Street Open As Gold Dives, Dollar Cements Highs
Bitcoin carves out its own trajectory as Wall Street trading gets underway in the first session after Easter.
Bitcoin (BTC) reclaimed $41,000 on April 14 as the first day of Western stock market trading after Easter painted a more bullish picture.
Analysis Calls For Caution On BTC
Data from Cointelegraph Markets Pro and TradingView showed BTC/USD spiking above $41,000 during April 19, reaching five-day highs on Bitstamp.
In a refreshing change to the gloomy atmosphere over the holiday period, the largest cryptocurrency began to copy what gold had achieved days prior, the latter since declining from $1,998 to $1,960 per ounce at the time of writing.
Equally energized, however, was the U.S. dollar, which continued cementing its strength in an ongoing potential headwind for BTC.
The U.S. dollar currency index (DXY) remained above the crucial 100 mark on the day, with analysts previously predicting that its next move would be a make-or-break moment for crypto.
As crypto sentiment exited “extreme fear,” monitoring resource Material Indicators nonetheless called for a level-headed appraisal of BTC price action.
Several moving averages, it said on April 19, needed to be reclaimed before the outlook could fundamentally change.
Before you get too excited about yesterday’s #Bitcoin PA, remind yourself that bulls need to reclaim these key moving averages to validate a trend reversal. To avoid potential bull trap, watch for volume and wait for confirmations. https://t.co/26BLOFwenL pic.twitter.com/r219S4YYCv
— Material Indicators (@MI_Algos) April 19, 2022
On April 18, however, the account acknowledged the “bullish” nature of the current chart setup.
Pundit Pins Hopes On RSI Bull Trigger
In a now rare bull flag from the stock market, meanwhile, the S&P 500 posted a bottom signal on April 19, which has historically spurred BTC price gains.
The move involves the stochastic relative strength index (RSI) on the three-week chart. Aurélien Ohayon, CEO of software firm XOR Strategy, concluded that a repeat performance was now due.
#BITCOIN ONE OF THE MOST ACCURATE BOTTOM DETECTORS I HAVE FOUND.
When the 3W-Stochastic RSI K-line of the S&P500 touched the 0 line, a #BTC bottom has been reached and a huge bull run has followed.
— TAnalyst (@AurelienOhayon) April 18, 2022
Bitcoin’s own RSI chart looked similarly primed for positive performance. On daily timeframes, RSI stood at 44.7, having just climbed above the 14-day moving average in what has been a bullish event throughout 2022.
Bitcoin Struggles As Dollar Breaks Multi-Year Bearish Trend Line
The latest moves in crypto markets in context for April 19, 2022.
While bitcoin has held vital support, the cryptocurrency does not appear to be out of the woods yet, given the continued strength of the U.S. dollar.
The top cryptocurrency by market value traded near $40,700 at press time, having printed a high of $41,250 during the Asian trading hours. On Monday, buyers held the three-day chart 200-period moving average, staving off a major technical breakdown.
The dollar index (DXY), which tracks the greenback’s value against majors, rose to 101 early today, refreshing two-year highs and taking the month-to-date gain to 2.5%.
The global reserve currency has risen 12% since May 2021, marking its best stretch since its run-up in late 2014 through early 2015, per data provided by charting platform TradingView.
The DXY may see further gains, as the monthly chart shows the two-decade bearish trendline has been breached to the upside.
“We’ve been warning that USD strength is one of the biggest headwinds for markets, including BTC and crypto. As BTC struggles to keep its head above $40K, the U.S. dollar index (DXY) just broke 100 for the first time in almost two years,” analysts at Delphi Digital wrote in a note published Monday. “The greenback is now on the verge of a multi-decade breakout as two of its major currency pairs (EUR and JPY) are both vulnerable of technical breakdowns of their own. The EUR and JPY make up ~70% of the DXY index.”
“Looking back over the last 10 years, we can see how BTC’s price tends to trend in the opposite direction of DXY momentum. In other words, when the dollar is gaining momentum, BTC underperforms (and vice versa),” Delphi’s analysts added.
Ether, the second-largest cryptocurrency by market value, traded flat at around $3,050, having tested dip demand under the psychological support of $3,000 yesterday. The cryptocurrency has seen increased demand for December call options in recent weeks.
“Ethereum is caught between two powerful colliding forces: (declining on-chain activity + market correlation) vs. (institutional adoption + Web3),” Ilan Solot, partner at the Tagus Capital Multi-Strategy Fund, said in an email. “The latter will prove a secular shift, while the former is merely a cyclical dynamic. These cyclical forces are coiling ETH ever tighter into a spring.”
While top cryptocurrencies traded sideways, Terra’s LUNA and privacy-focused monero (XMR) chalked up double-digit gains.
Terra’s algorithmic stablecoin UST replaced Binance USD (BUSD) as the third-largest stablecoin by circulation during the later hours of Monday. Monero is set to implement a hard fork in July to improve network security and fee changes, developers confirmed in a GitHub post.
U.S. Dollar Surges Amid Investor Jitters, Rising Yields
WSJ Dollar Index within striking distance of highest level since 2002 after gaining 1% Thursday.
The U.S. dollar extended its rapid climb Thursday, reaching multiyear highs against the euro, the British pound and the yen.
The U.S. currency has been one of the few beneficiaries this year of a market battered by geopolitical fears and worries about the consequences of interest-rate increases from the Federal Reserve.
The WSJ Dollar Index, which measures the U.S. currency against a basket of 16 others, has risen 7.1% in 2022, outpacing everything from stocks to bonds to gold.
That has provided shelter to investors seeking reprieve from volatility elsewhere in markets, while stirring concerns about how a strong dollar might affect everything from multinational companies to emerging-market economies.
The dollar tends to perform well when investors ditch riskier investments and seek shelter in assets that they perceive as more secure. Its status as the world’s reserve currency makes the dollar a particularly attractive haven.
Analysts also attribute its strength to U.S. economic resilience and a central bank ramping up to battle inflation by raising interest rates. Investors now expect the Fed will begin a rapid series of rate increases, including a half-percentage point at its meeting next month.
The bulk of the dollar’s appreciation occurred just this month, said Stephen Gallo, European Head of FX strategy for BMO Capital Markets.
The WSJ Dollar Index rose 0.74% to 95.89 Thursday, even as the S&P 500 added 2.5%. That marked the index’s highest closing level since March 2020, when the coronavirus pandemic sent stocks plummeting and investors piling into the dollar.
The dollar has now climbed in all but two of the last 21 trading sessions, putting the currency within striking distance of a 20-year high. The dollar index rose as high as 97.33 in March 2020 on an intraday basis—around 1.4% above its recent levels. Any move past that would be the index’s highest level since 2002.
Higher interest rates typically support the dollar by making U.S. assets more attractive to yield-seeking investors. Investors expect that the Fed will increase short-term rates more aggressively this year than its central-bank peers.
The Bank of Japan on Thursday reinforced its commitment to low interest rates despite rising inflation. The bank said it would purchase 10-year Japanese government bonds at a yield of 0.25% every business day to ensure that the yield doesn’t exceed that level. That sent the yen weakening to more than 130 to the dollar for the first time since April 2002.
The European Central Bank, meanwhile, would continue to lag behind the Fed in tightening monetary policy, ECB President Christine Lagarde said earlier this month, noting that the euro area’s economy is likely to absorb a greater blow from the war in Ukraine.
The dollar rose 0.57% against the euro Thursday, closing at $1.05—the euro’s lowest closing rate since 2017. Investors have attributed the euro’s fall this week to growing worries about rising energy prices and lower economic growth.
Elsewhere in currency markets, the greenback advanced 0.69% against the British pound to its highest level since mid-2020. The British pound has lost over 5% against the dollar since the beginning of the month.
“When two of the biggest central banks in the world are maintaining easy monetary policy on a relative basis versus the Fed, those rate differentials…are a huge part of the dollar’s strength,” said Charlie McElligott, a cross-asset macro strategist at Nomura Securities International.
Also boosting the dollar, analysts and investors said: the war in Ukraine and fears that mounting Covid-19 cases in China will spawn further pandemic lockdowns.
A strong dollar has implications for global economies and markets. Companies in the S&P 500 generate roughly 40% of their revenue from outside the U.S., FactSet data show, and a strong dollar makes it more expensive for companies to bring home foreign sales.
Already this earnings season, companies including Alphabet Inc. and Microsoft Corp. have mentioned the negative impact of a strong dollar on results.
A strengthening dollar also tends to weigh heavily on emerging markets and often causes foreign traders to pull back from investing there. By pushing down the value of emerging-market currencies, a rising dollar makes dollar-denominated debt more expensive for them to repay.
On Thursday, the dollar jumped against emerging-market currencies, cutting further into the gains that some notched earlier this year. The greenback rose 1.3% against the Chilean peso and 0.9% against the South African rand. It pared initial gains against the Brazilian real.
The pace of the dollar’s rise this year has surprised some analysts and investors and has already begun to reset expectations for the rest of the year.
“I am this week doubting my view that the dollar would give back some of its gains, and I am beginning to fear that we will have a stronger dollar for longer this year,” said Jane Foley, head of foreign-exchange strategy at Rabobank.
“The global economic conditions that will lead to [a stronger dollar] are not pretty,” she said. “We’re talking about Europe’s [economy] under potential pressure and the greater possibility of a lack of energy supply to Germany. We’re talking about slower growth in China.”
Bitcoin Rejects $40K As US Dollar Strength Hits 20-Year High
The U.S. dollar currency index breaks through resistance to hit its highest level since 2002 — to the detriment of practically everything.
Bitcoin (BTC) made a fresh bid to crack $40,000 on April 28 as Wall Street trading opened to twenty-year highs for U.S. dollar strength.
DXY Now In “Parabolic Rally”
Data from Cointelegraph Markets Pro and TradingView showed BTC/USD hitting a high of $39,883 on Bitstamp before momentum waned, sending the pair $800 lower hours later.
Traders had predicted what they saw as a relief bounce, with the implication that the subsequent rejection would spark continuation of the downtrend.
On the day, caution was advised.
“BTC currently consolidating in this falling wedge. In case of a breakout, I’d be targetting $42 thousand. It’s good to wait for confirmation first if you decide to take the trade, IMO,” popular Twitter account Daan Crypto Trades argued.
“Only a strong break and reclaim of $40.6 thousand would make me look at higher targets,” fellow trader Crypto Ed added.
“Charts: mostly pointing lower. Liquidity: a squeeze to the upside to hunt the shorts.”
However, with limited movement on Bitcoin, itself, attention was fully focused on the dollar, which continued to outdo itself as the U.S. dollar currency index (DXY) hit its highest levels since 2002.
“The parabolic rally by DXY does not bode well for risk-on assets like stocks and Bitcoin. Until the rally cools off, playing defense is the way to go,” commentator Benjamin Cowen warned.
Others agreed that DXY was now “parabolic,” while trading guru Blockchain Backer saw similarities between the dollar’s current setup versus other currencies and the period immediately after the March 2020 COVID-19 cross-asset crash.
U.S. Dollar Currency Index (DXY) is rising and parabolic.
Started peeking at other currencies, and was looking at the Euro vs USD (EURUSD). And realized… I’ve seen this before. This was how the bottom looked in the crypto market before the big reversal happened after C-19. pic.twitter.com/M8uxBYZXX0
— Blockchain Backer (@BCBacker) April 28, 2022
A reversal of trajectory for USD should give Bitcoin some relief, the theory goes, with Cointelegraph contributor Michaël van de Poppe forecasting it to do “really well” in such circumstances.
Analyst: USD will crumble in upcoming “major currency crisis”
The rampant USD was, meanwhile, sparking concerns about knock-on effects for other economies.
Should instability enter the picture, volatility may return to haunt risk assets already at the mercy of central bank anti-inflation policy. Ironically, the spark might be Japan, where the central bank continues to print money.
“Whichever way Yen goes from here, chaos follows,” Brent Johnson, CEO of Santiago Capital predicted on April 27.
“If capital flows back into Japan & it retraces to the support line, it’s a rug pull on funds allocated to rest of the globe. If continues to dive it pressures the PBOC to let the Yuan also fall. Neither of these options is good…”
The Japanese yen also traded at twenty-year lows on the day.
“What do Keynesian investors do in a crisis? They rush into the $ thinking it is safety,” Alasdair Macleod, head of research for precious metals trading firm Goldmoney, added.
“Nearly all investors and money managers have been brainwashed into thinking this way since the Nixon shock. This morning JPY slide accelerates.”
Macleod saw what he called a “major currency crisis” coming, engulfing the dollar’s strength “next” as it followed the fate of the yen, euro and pound sterling.
Crypto And The Dollar Are Partners, Not Rivals
The disruptions of Covid and Russia’s invasion of Ukraine have shown the strength of the Western system and the weakness of China’s.
“My hope is that it creates world peace or helps create world peace.” That’s what Jack Dorsey, the former Twitter Inc. chief executive and now head of the digital payments company Block Inc., said about Bitcoin at a webinar in July 2021.
It is more likely that war creates a bigger global appetite for Bitcoin. Times of tumult are often associated with monetary transformations.
A classic example is the way, in the time of the Black Death and the Hundred Years’ War, the English monetary system was fundamentally altered.
There was a post-plague spike in commodity prices — especially for salt, the price of which rose sevenfold from 1347 to 1352. At the same time, the survivors of the Black Death were able to exploit a tight labor market to exchange feudal bondage for cash wages. The English economy became increasingly monetized.
European merchants, meanwhile, developed a new form of peer-to-peer credit instrument, the bill of exchange, which facilitated trade between England, the Low Countries and northern Italy.
More recent examples abound. The Spanish conquests in the New World transformed the global economy by increasing the supply of silver and gold, much of it used to pay for the Habsburgs’ European wars. The expansion of the British Empire exported the gold standard, creating a new and more stable international monetary system in which sterling was the dominant currency.
The world wars left Britain weighed down by debt and ushered in the first era of dollar dominance, with the U.S. currency pegged to gold and all the other major currencies less rigidly pegged to the dollar.
It was conflict, once again, that ended that Bretton Woods system in 1971. As the Vietnam War dragged on, President Richard Nixon’s breaking of the dollar’s peg to gold ushered in a new era of floating fiat currencies, characterized at first by high inflation and exchange rate volatility, then by a series of international agreements (the Plaza Accord in 1985, the Louvre Accord two years later), latterly by more ad hoc and less transparent arrangements in an environment of falling inflation and rapidly growing capital flows.
The events of the past two years — first the Covid-19 pandemic and now the Russian invasion of Ukraine — have been sufficiently disruptive to make another shift in the global monetary order seem likely. But what form will it take? Two hypotheses have come to the fore, by no means mutually exclusive.
The first is that cryptocurrency’s hour has arrived. In the words of Michelle Ritter, chief executive of the tech company Steel Perlot Management LLC, “Social media’s hinge moment came in 2011, when videos, tweets and other posts from Libya, Egypt, Yemen, Syria and Bahrain sparked the Arab spring … [Now] we find ourselves at a similar turning point” with cryptocurrency.
The hedge fund Bridgewater Associates LP noted that “Russia’s invasion of Ukraine is the first major event where cryptocurrencies are part of the equation.”
Hypothesis two is that we are witnessing the twilight of the dollar. According to Zoltan Pozsar of Credit Suisse Group AG, the decision by the U.S. and its European allies to freeze much of the Russian central bank’s foreign-exchange reserves was a watershed moment.
It will, he has argued, “encourage central banks to diversify away from the dollar, or try to re-anchor their currencies to assets that are less susceptible to influence from U.S. or European governments.”
According to Pozsar’s March 7 note, “Bretton Woods III,” we are leaving behind the post-1971 Bretton Woods II, a system in which “inside money” (U.S. Treasuries) replaced “outside money” (gold). Bretton Woods III will take us back to outside money (gold and other commodities) as the world reduces its reliance on dollars and dollar-denominated bonds.
BitMEX founder Arthur Hayes made a similar point in his March 16 essay, “Energy Cancelled.” “Why should any central bank ‘save’ in any Western fiat currency, when their savings can be expropriated arbitrarily and unilaterally by the operators of the digital fiat monetary networks?” In “The Doom Loop,” he predicts “$1 million Bitcoin and $10,000–$20,000 gold by the end of the decade.”
These gentlemen are by no means the first to predict the demise of the dollar. But whenever I hear such arguments I am reminded of an old Larry Summers line. Speaking at Harvard’s Kennedy School of Government in November 2019, the former Treasury secretary observed: “You cannot replace something with nothing.”
What other currency was preferable to the dollar as a reserve and trade currency, he asked, “when Europe’s a museum, Japan’s a nursing home, China’s a jail, and Bitcoin’s an experiment”?
First, take a look at what happened when crypto went to war. At the beginning of the Russian invasion there was a great deal of discussion about how the Kremlin would somehow use cryptocurrency to evade Western sanctions. Certainly, there was an initial surge of ruble purchases of Bitcoin.
But American and European regulators put the major crypto exchanges on notice. Coinbase Global Inc. blocked over 25,000 Russia-linked addresses that it believed were linked to illicit activity.
In any case, as Tigran Gambaryan of Binance Holdings Ltd. pointed out, “Crypto is not a very efficient way for a government and for a nation-state to elude sanctions.”
Crypto played a bigger part in facilitating private donations to the Ukrainian government. According to Gillian Tett of the Financial Times, writing on March 10, “about $106 million of crypto donations have flooded in.” Vitalik Buterin, the founder of Ethereum, tweeted: “Reminder: Ethereum is neutral, but I am not.”
His co-founder, Gavin Wood said he would “personally contribute $5 million” if Polkadot, his new token, was accepted. Sergey Vasylchuk, chief executive of blockchain company Everstake, launched a decentralized autonomous organization based on the Solana blockchain to raise donations for the Ukrainian army.
Slava Ukraini! But please note that $106 million is a rounding error compared with the amounts of dollar-denominated military aid Ukraine is receiving from the U.S. government, which could total $19.67 billion if the Biden administration’s latest proposal is approved by Congress.
Let’s keep this simple. Cryptocurrencies such as Bitcoin and Ethereum are attractive assets to hold in unstable places and at unstable times. Certain kinds of stablecoins (pegged to the U.S. dollar) may be even more attractive.
As Sirio Aramonte, Wenqian Huang and Andreas Schrimpf point out in a recent Bank for International Settlements note, that’s why there was so much Turkish trading in stablecoins in 2020 and 2021, as the pandemic combined with the Turkish government’s reckless monetary policy to tank the lira.
When the pandemic began, you really were well advised to put some money into Bitcoin and Ethereum. Relative to January 2020, your investments are up by factors of, respectively, 21.7 and 5.4.
Your gold position is up just 25%. Even in time of war, crypto has beaten out gold. Since the eve of the Russian invasion, Bitcoin is up 3.8%, Ethereum 9.1% and gold is down 1%.
But in war one needs more than assets that retain or gain value. It is much more important to be able to make payments to domestic and foreign vendors in return for the stuff you need from them. As is well known, the Ethereum blockchain can process only about 15 transactions a second, whereas Visa can handle thousands of credit-card transactions a second.
For Russia over the past two months, it was more important that Western credit-card companies could not disable Russian payments than that Russians could buy Bitcoin.
And that is because since 2014 (when their first, more limited invasion of Ukraine happened) the Russians have built their own National Card Payment System (NSPK) for processing transactions and a domestic card system known as Mir which runs on the NSPK rails — as do cards issued by China’s UnionPay Co.
In the great scheme of the global economy, digital payments are a bigger deal than crypto. That is because payments systems exploiting artificial intelligence — such as Ant Financial Services Co.’s Alipay and Tencent Holding Ltd.’s WeChat Pay — can process vastly more transactions much faster than any blockchain-based system and can then spit out credit ratings based on the data they aggregate and analyze.
Several years ago, I grew very concerned that these Chinese payment systems were going to eat the world — or at least were going to become dominant in emerging markets. Fortunately for the Western world, the Chinese Communist Party decided that Alibaba founder Jack Ma was getting too big for his boots and pulled the plug on his and Eric Jing’s plans for world domination.
The Chinese challenge in payments is not over, however. Bytedance Inc.’s immensely popular TikTok platform is implementing payments features.
Kenyan fintech giant M-Pesa, Ethiopian state-owned Ethio Telecom and Pakistani telecom provider Jazz are among the companies in 19 countries using Huawei Technology Co.’s Mobile Money platform. Chinese-owned African mobile payments platform OPay is now the second-largest fintech startup in Africa in terms of size and value.
But the new thrust of Chinese policy is to persuade other countries’ central banks to develop digital currencies that are interoperable with China’s central bank digital currency, e-CNY, via “bridges” between central banks.
Thailand, Hong Kong and the United Arab Emirates are working with China on such bridges. China’s alternative to SWIFT — a renminbi-denominated Cross-border Interbank Payments System — now has 1,200 member institutions across 100 countries.
Another Chinese agency is the state-backed Blockchain-based Service Network (BSN), which aims to create a digital architecture connecting public and private blockchains. In 2021, BSN launched the Universal Digital Payment Network, which seeks to build a “standardized digital currency transfer method and payment procedure.”
According to Chinese reports last August, at least three foreign banks are planning to access e-CNY through a private clearing platform built by Shanghai’s City Bank. As the February 2022 Beijing Olympics showcased, foreigners in China can already create their own e-CNY wallets without a Chinese banking account.
Yet if China plans to build an alternative payments architecture to the one dominated by American and European institutions, it has a very, very long way to go.
In January, shortly before the Russian invasion of Ukraine, China held just over $1 trillion of its roughly $3 trillion worth of foreign reserves in U.S. Treasury bonds, according to the Treasury Department. More than half of China’s reserves are denominated in dollars, according to the most recent data published by the State Administration of Foreign Exchange.
Beijing has clearly been flabbergasted by the U.S. decision to freeze Russia’s central bank reserves. “Chinese economists … find it shocking that the U.S. would carry out such measures against Russia,” wrote the Chinese economist Yu Yongding of the Chinese Academy of Social Sciences last month.
“The international financial system is based on the trust that all participants will play by the rules, and honoring debt obligations is one of the most important rules there is.
Whatever the justification, freezing a country’s foreign-exchange reserves is a blatant breach of that trust … Now that the U.S. has proved its willingness to stop playing by the rules, what can China do to safeguard its foreign assets? I don’t know.”
I don’t know either. The problem for China is that prophecies of the dollar’s demise, which people have been making since the late 1960s, keep turning out to be wrong.
True, as the University of California, Berkeley’s Barry Eichengreen has pointed out, the dollar’s share of allocated international reserves has declined somewhat since the beginning of the century, from 71% to 59%. But it’s not as if central banks have been swapping dollars for renminbi.
The currencies that have grown more popular with reserve managers are those of Canada, Australia, Sweden, South Korea and Singapore. This is not an erosion of dollar dominance that greatly diminishes the ability of the U.S. to impose financial sanctions. As the Russians have discovered, even the Swiss were willing to participate in the Russian reserve freeze.
Nor is that the only measure of dollar dominance. In 2021, the U.S. currency was used in 40% of all international payments by total transaction value. In second place was the euro. The Chinese currency came a miserable fourth — just 2.7% — behind even sterling.
In The Words Of Sebastian Mallaby Of The Council On Foreign Relations:
Dollar defeatism is vastly overblown. Around the world, almost three-fifths of private foreign-currency bank deposits are held in dollars. A similar share of foreign-currency corporate borrowing is done in dollars. …
The Federal Reserve estimates that foreigners hoard about half the outstanding stock of dollar bank notes. … [Foreign central banks] hold dollars knowing that others will gladly accept them, just as many learn English because others speak it. … A standing credit line in renminbi is the financial equivalent of fluency in Esperanto.
As the prolific economic historian Adam Tooze points out, the other central banks that issue reserve currencies are all on the other end of swap lines from the Federal Reserve, key sources of liquidity in times of financial crisis such as late 2008 and early 2020.
Meyrick Chapman argues persuasively that, for the global economy, “America remains the ‘consumer of last resort.’ Until that changes, the dollar will retain its ascendency.”
All of this helps explain the extraordinary dollar rally we have seen this year, which has seen it strengthen significantly against most other major currencies, particularly the Japanese yen, which has depreciated by nearly 27% since the beginning of 2021. The euro is down by 16%, the pound by 10%.
Can we therefore, like Larry Summers, dismiss cryptocurrency as a mere experiment? Some might go even further, condemning it as no better than a host of Ponzi schemes.
There are now between 10,000 and 20,000 different cryptocurrencies in existence, according to CoinMarketCap. That would be excessive even if they were all impeccably designed and managed.
There is a great deal of loose talk among the crypto bros. What is one to think when (for example) Mike Novogratz of Galaxy Digital LP says of his favorite stablecoin, Terraform Labs’ UST, that it’s “all good as long as there’s not a run on the bank.”
What, like Lehman Brothers?
Or how about this from Sam Bankman-Fried, founder of crypto exchange FTX, who was asked to explain the practice of yield-farming on Bloomberg’s “Odd Lots” podcast.
Yield farming, to put it simply, is borrowing someone else’s crypto tokens in exchange for your own “governance tokens,” and then exchanging the borrowed tokens for higher-yielding DeFi (decentralized finance) instruments. This was how Bankman-Fried put it:
Like this is a valuable box as demonstrated by all the money that people have apparently decided should be in the box. And who are we to say that they’re wrong about that? … And so then, you know, [the governance] token price goes way up.
And now it’s a $130 million market cap token because of, you know, the bullishness of people’s usage of the box. And now all of a sudden, of course, the smart money [goes and pours] another $300 million in the box and … it goes to infinity. And then everyone makes money.
Never mind the Wild West; this is the Wacko West. According to a report from the blockchain analytics firm Elliptic, around $10 billion in DeFi projects was lost to various hacks and scams in 2021.
In one case, members of the Bored Ape Yacht Club — who collect non-fungible token cartoons of, yes, bored apes — were duped into giving up the passwords to their crypto wallets.
When you read such stories, you begin to understand the strong impulse of so many central bankers and financial regulators around the world to shut down the whole crypto circus.
Some countries have already banned the use of crypto for payments as well as bitcoin mining: not only China, but also Algeria, Bangladesh, Bolivia, Egypt, Morocco and Nepal.
There are European and American officials who itch to regulate crypto more tightly, if not to ban it, such as Fabio Panetta of the European Central Bank, Gary Gensler of the Securities Exchange Commission and acting U.S. Comptroller of the Currency Michael Hsu, who recently compared the current state of crypto to the “fool’s gold rush” before the 2008-9 financial crisis.
We know already which way Brussels will go. Grinding its way through the European bureaucracy is the European Commission’s Markets in Crypto-Assets Regulation, which will require crypto exchanges to make full disclosure of everyone buying and selling digital assets.
The British government, by contrast, clearly hopes to attract more crypto business to London — hence Chancellor of the Exchequer Rishi Sunak’s suggestion that the venerable Royal Mint should develop an NFT, a flight of fancy that went down badly with Patrick Jenkins of the Financial Times (“the crypto cult exudes an oligarch-like arrogance”).
But what will the U.S. opt to do? Last year it seemed as if the Genslerites were in the ascendant and European-style regulation was only a matter of time.
All that changed with the fight that broke out inside the Beltway over last year’s infrastructure bill, which alerted a significant number of Democratic legislators to the fact that the U.S. crypto community now has both votes and dollars.
According to a recent Morning Consult survey, 20% of American adults and 36% of millennials own cryptocurrency. As Kevin Roose pointed out in a voluminous primer for the New York Times, crypto is suddenly ubiquitous, with Matt Damon and Larry David doing ads, the mayors of Miami and New York City touting their pro-bitcoin credentials, Colorado and Florida vying to be the No. 1 crypto state, two NBA arenas named after crypto companies, and both Pepsi and Applebee’s offering their own NFTs.
Most important of all, “crypto entrepreneurs are donating millions of dollars to candidates and causes, and lobbying firms have fanned out across the country to win support for pro-crypto legislation.”
The first fruit of all this lobbying was the White House executive order issued on March 8, 2022, on the “Responsible Development of Digital Assets.”
Gone was the hostile language of last year. “The rise in digital assets creates an opportunity to reinforce American leadership in the global financial system and at the technological frontier,” states the EO.
“The United States must maintain technological leadership in this rapidly growing space, supporting innovation while mitigating the risks for consumers, businesses, the broader financial system and the climate.”
This is crypto’s glad confident morning in Washington. “We are in a similar moment with cryptocurrencies,” declared Democratic Senator Ron Wyden recently, “to the one we were in 30 years ago in the early days of the Internet.” I hear this a lot in Silicon Valley, too. But what exactly does it mean?
It is generally agreed that the U.S. dominance of the first two eras of the Internet — Web 1.0 (nerds with email and web pages) and Web 2.0 (nerds making money by building platforms) — owed much to the relatively permissive legislation passed by Congress in the 1990s, notably the 1996 Communications Decency Act, and specifically its Section 230.
In essence, Section 230 created a special regulatory space for the rapid development of Internet platforms by exempting them from the legal liabilities associated with publishing companies, while also entitling them to moderate content as they saw fit.
The really interesting question for today’s legislators is: What would a Section 230 for DeFi/Web 3.0 look like? In a provocative new blog post, Manny Rincon Cruz proposes three elements:
No Virtual Asset Service Provider (VASP) status for developers of decentralized protocols. Code is already protected as free speech, and decentralized protocols have no intermediaries providing exchange, custody, or transfer services because DeFi users transact directly with each other.
Exclude DeFi “exploits” from the Computer Fraud and Abuse Act (CFAA). Exploits occur when a user interacts with a protocol, as its code is written, and profits by taking advantage of arbitrage opportunities or design weaknesses. As long as users do not break other criminal laws, exploits help DeFi by exposing buggy code.
No banking charter requirements for stablecoin issuers such as Circle and Tether. Unlike bank deposits, users can sell their USDC or USDT without redeeming them. Since these stablecoins cannot produce “bank runs,” they should not be subject to banking-specific regulations.
No doubt this is just the beginning of a debate about what light-touch regulation might look like for Web 3.0. But it is surely a better debate to have than one about how to out-regulate the Europeans.
The point is that U.S. dollar dominance and flourishing crypto are not alternatives to one another, but complementary.
Just as Bitcoin was never meant to be — and never will be — a substitute for the dollar, so DeFi is additional to rather than a substitute for the existing financial system, which we shall no doubt continue to use for decades to come in order to pay our taxes and also, I would guess, our employees and our utility bills.
Bitcoin is not about to bring about world peace, despite the hopes of some early enthusiasts. Nor will crypto emancipate us from the protective if sometimes stifling embrace of the nation-state, as some radical libertarians once imagined.
But if decentralized finance becomes as big an American success story as e-commerce has been, then it will provide yet another reason for foreigners to invest in America — and therefore to own and transact in dear old dollars.
The Hideous Strength Of The U.S. Dollar
The U.S. currency’s rapid rise will make it harder for other countries to curb inflation.
“It’s our currency, but it’s your problem,” was the 1971 message from John Connally, Richard Nixon’s treasury secretary, to U.S. trading partners dismayed by the dollar’s then weakness.
What was true then remains true today, albeit in the opposite direction with the greenback having risen 6% in April and 13% in the past year to its strongest level for two decades against a basket of major currencies.
The Federal Reserve needs to be mindful of the threat to global growth posed by the U.S. currency’s rapid ascent.
The greenback is the logical haven for investors seeking financial refuge from a confluence of global shocks that started with the pandemic and has been intensified by Russia’s invasion of Ukraine, culminating in an energy and food price surge.
King dollar rules supreme as the Fed maintains a policy of benign neglect in the currency market, having provided almost limitless access to dollar liquidity for central banks around the world in the past two years.
Bar a handful of outliers, including the Brazilian real and the Peruvian sol, the dollar is omnipotent versus pretty much every currency in both the developed and developing world.
That’s putting the squeeze on policy makers everywhere to defend their currencies or risk importing yet more inflation into their already beleaguered economies.
The Fed’s monetary policy is dictated by the needs of the domestic economy. With inflation, the most important element of its mandate, surging by 8.5% in March, the U.S. central bank is expected to follow March’s quarter-point interest-rate rise with accelerated half-point increases starting this week.
The futures market anticipates a Fed funds rate of at least 2.5% by year end, up from 0.5% currently; the dollar’s ascent reflects expectations for a shift in interest-rate differential with other countries.
The stronger dollar is also doing the Fed’s work in combating inflation by tightening financial conditions on a trade-weighted basis.
Although the U.S is the world’s largest economy and a huge importer of goods, it is relatively insulated from the global energy and food price shock by its domestic production of fuel and foodstuffs.
It also benefits because all major commodities are priced in dollars. It’s everyone else’s problem if raw materials suddenly become more expensive in their respective currencies.
The world has suffered bouts of an overly strong or weak dollar several times during the past half-century. The explosion in oil prices in the 1970s culminated in a global recession, exacerbated by the aggressive rate hikes implemented by Paul Volcker’s Fed. His inflation-beating policies in turn resuscitated the dollar into the mid-1980s:
The perceived advantage that delivered to the exporting nations of Japan and Europe versus American industry led to the 1985 Plaza Accord, which dramatically reversed the dollar’s strength and boosted the U.S. economy at the expense of other nations, particularly Japan.
The current weakness in the currencies of Japan and Europe would typically be welcomed for juicing their exports. But the recent slippage in the Chinese yuan, the world’s second-most important trade-weighted currency, puts matters into a different league.
All three regions are facing an unusual and potentially intractable problem of imported inflation. There’s a clear and present danger of rising prices slowing global economic growth to the extent that a recession is possible, and stagflation a real risk.
“The dollar’s rally is like an uphill avalanche,” according to Kit Juckes, a currency strategist at Societe Generale SA. “Just as an avalanche picks up snow, rocks, trees and anything else in its path as it slides down a mountain, the dollar’s rally has the knock-on impact of causing more currencies to weaken. A broad-based move, though, tightens global monetary conditions, and so downside economic risks grow.”
At some point this will start affecting the U.S. economy and become relevant to Fed decision-making, but that could take a while. Sure, U.S. gross domestic product surprised on the downside by declining at an annualized rate of 1.4% in the first quarter.
But this was due to a surge of net imports, no doubt helped by the extra purchasing power of a stronger dollar, combined with a slump in exports.
With the Fed’s balance sheet still at nearly $9 trillion, there are plenty of dollars swimming around. The central bank is expected to start actively selling its bond holdings, possibly as soon as this summer, which may reduce overall liquidity and, counterintuitively, make the dollar less of a haven.
Fewer dollars should in theory boost its value, but the world needs to become a better, safer place before the greenback’s uptrend meaningfully reverts. For the sake of the global economy, here’s hoping King Dollar’s crown starts to slip.
Stronger Dollar Prospects Risk Pushing Down Bitcoin Price To $32K
The U.S. dollar index could rally further in the coming weeks, which is typically bad news for Bitcoin.
The U.S. dollar’s ability to continue its rally in Q2 could prove fatal for Bitcoin (BTC), which has demonstrated an inverse correlation with the dollar since January 2022.
Dollar Paints “Bull Flag”
The U.S. dollar index (DXY), which measures the greenback’s strength against a basket of foreign currencies, reached its 21-month trading high of 99.82 on April 7, the highest level since May 2020.
The index now looks poised to continue its upside move further as it breaks out of a classic bullish continuation pattern — called a “bull flag.”
In detail, bull flags appear when the price consolidates lower inside a parallel descending channel after undergoing a strong uptrend (called flagpole). In theory, the pattern is resolved after the price breaks out of their range to the upside to reach the level located at a length equal to the flagpole when measured from the breakout point.
The bull flag setup therefore puts the next upside target for DXY at 101.
Golden Cross On The Weekly Chart
The DXY index is also forming a bullish golden cross for the first time since April 2019.
Golden crosses occur when an asset’s short-term moving average rises above its long-term moving average. Many analysts consider the crossover as a bullish technical signal due to its history of preceding strong uptrends.
DXY’s last golden cross between its 50-week and 200-week exponential moving averages (EMAs) came before a 4% upside move.
A similar bullish setup now nears for a 50-200 EMA crossover in April, notes Alexander Mamasidikov, co-founder of crypto wallet service MinePlex.
“The formation of the golden cross on the U.S. dollar index marks a period of temporary strength for the greenback with an expectation for it to tick stronger growth potentials against other currencies,” he explained, adding:
“The ensuing strength of the U.S. dollar following the golden cross formation will help to stump the impact of inflation as the greenback’s purchasing power is boosted.”
Where Does It Leave Bitcoin?
Interestingly, Bitcoin has been forming the opposite setup to the dollar, dubbed a bear flag — suggesting more pain ahead for the BTC/USD pair.
Bear flags appear when the price consolidates higher inside a parallel ascending channel and resolve after it breaks below the channel’s lower trendline with convincing volumes. In a “perfect” scenario, a bear flag breakout results in the price falling as low as the height of the previous downtrend.
Thus, Bitcoin could see a drop to the flag’s lower trendline around $40,000, opening the door for a drop toward $32,000.
There it is, now we’ll check off the 2nd target box on $DXY drawn months ago.
– Daily, Weekly, & Monthly RSI look bullish
– Daily, Weekly, & Monthly MACD look bullish
– Above 200 W MA since November
– May 2020 last time it was this high
— Jesse Olson (@JesseOlson) April 7, 2022
Nonetheless, Mamasidikov says Bitcoin could hold above $42,500 even if the dollar rises on the other end of the spectrum.
Recalling the adoption boom of summer 2021 (when Bitcoin’s correlation with the DXY was largely positive), investors continue to hodl BTC as a part of their long-term strategy.
“Despite the seeming uncertainty in the market, Bitcoin has formed strong support at $42,500 and has the fundamental backing to retest $47,000 in the short term.”
Dollar Surges To Highest Since Mid-2020 As Treasury Yields Jump
* U.S. Currency Is ‘Still On Fire,’ Jefferies’ Bechtel Says
* Ten And 30-Year Yields Climb To Levels Not Seen Since 2019
A gauge of the U.S. dollar’s strength climbed to its highest level in close to two years as Treasury yields continued to jump Friday, with traders bracing for an aggressive series of interest-rate hikes from the Federal Reserve.
The Bloomberg Dollar Spot Index rose as much as 0.4%, eclipsing the previous high for 2022 and reaching a level unseen since July 2020. The dollar advanced against most of its peers, with some of the biggest gains coming against the Australian and New Zealand currencies. At the same time, the British pound dipped below $1.30 for the first time since November 2020.
With real-yield trends reaching higher levels than anticipated, some strategists are starting to reconsider their projections for the greenback. “Our base case is still for the U.S. dollar to weaken over the next three to six months, but that’s contingent on whether this trend in long-end real yields continues,” said Bipan Rai, head foreign-exchange strategist at Canadian Imperial Bank of Commerce.
The dollar has been buoyed this year as expectations for tighter Fed policy pushes up Treasury yields, with those on both the 10-and 30-year hitting roughly three-year highs on Friday. Concern about the Russia-Ukraine war has fueled demand for the greenback, which is typically seen as an investment haven during times of turmoil.
Yields climbed across the Treasury curve, with the 30-year rate rising as much as 5 basis points to 2.73%, a level unseen since May 2019, while the 10-year rate touched a similar level. Swap markets are currently pricing in the equivalent of almost nine additional quarter-point Fed rate hikes by the end of this year.
“Regardless of the new Covid strain and the war on Ukraine and supply chain issues and all this other stuff, the U.S. is still on fire,” said Brad Bechtel, a strategist at Jefferies LLC, speaking to the dollar’s relative strength compared with other currencies. “It feels like the U.S. is sort of pulling away from the rest of the world.”
Bitcoin Plumbs April Lows As US Dollar Strength Hits Highest Since May 2020
USD reaches 23-month highs while the Russian ruble joins in on the surprise gains.
$43,000 Hangs In The Balance
Data from Cointelegraph Markets Pro and TradingView captured another day of gloom for BTC bulls as the largest cryptocurrency slipped back under $43,000.
In a classic move, BTC/USD reacted unfavorably to a resurgent dollar, with the U.S. dollar currency index (DXY) returning above 100 for the first time since May 2020.
Coming on the back of tightening measures from the Federal Reserve, the greenback also spelled a headache for stocks, which opened down on the day.
While some considered the DXY event a temporary show of strength, its impact on crypto markets was clear to see, exacerbating an already wavering recovery from months of downside.
“Now the bullish chart is getting confirmation, which tells me we are closer to the end of this bull leg on DXY,” popular analyst Aksel Kibar told Twitter followers as a part of his comments.
For Cointelegraph contributor Michaël van de Poppe, the area between spot price and $40,000 was crucial to hold to preserve Bitcoin’s uptrend.
Beyond the dollar, Bitcoin was also struggling against another resurgent currency just weeks after hitting all-time highs against it.
The Russian ruble, fresh off record lows against all major world currencies, returned with a vengeance over the week, on April 8 beating its 2022 best in USD terms.
BTC/RUB traded at 3.46 million at the time of writing, its lowest since Feb. 27 and 34% below its record.
LUNA Brings Up The Rear On Major Altcoins
On altcoins, Ether (ETH) was a rare island of calm on the day as many of the top ten cryptocurrencies by market cap showed signs of strain.
ETH/USD traded flat at $3,220, limiting weekly losses after some impressive levels were reclaimed.
A notable weak performer on the daily chart was Terra (LUNA), down 6% at the time of writing, despite the buzz behind its issuer’s stablecoin backing plans.
Near Protocol (NEAR), also planning to release an algorithmic stablecoin, saw considerable upside over the past 24 hours after raising $350 million.
Dollar Strength Bucks Inflation Woes
Other major currencies fall as dollar climbs amid economic weakness world-wide.
Years ago, high U.S. inflation meant a weak dollar. So far, it is different this time, and many on Wall Street are betting it will stay that way.
The dollar is reaching multidecade highs against its trading partners, even with U.S. inflation at its highest level in nearly 40 years.
The U.S. Dollar Index, which tracks the currency against a basket of others, is reaching highs unseen since 2002. The greenback’s climb has sent the euro, British pound and Japanese yen tumbling.
That is a different story than the one that played out in the inflation-plagued 1970s. The dollar plunged nearly 40% against West Germany’s mark, then one of Europe’s most influential currencies, between January 1974 and 1980, according to Federal Reserve Bank of St. Louis data.
Federal Reserve Chairman Paul Volcker in 1979 began sharply raising interest rates, fueling a strong recovery.
Investors contend that economic weakness world-wide is driving today’s strong dollar. Covid-19 lockdowns in China have slowed industrial production in the region, and the war between Ukraine and Russia is driving up energy costs for European households, which depend on Russia for natural gas, and around the world. The eurozone’s economy faces the threat of a recession.
The picture in the U.S. is different. Consumers have more money in bank accounts. Even as prices rise, Americans are spending. Data show businesses pouring money into equipment and research and development. Fed Chairman Jerome Powell expressed confidence that the economy could weather a series of interest-rate increases at the Fed’s policy meeting Wednesday.
Traders will this week parse consumer-spending data and Friday’s monthly jobs report for clues regarding the health of the economy and the trajectory of the stock market. U.S. stocks fell sharply Thursday, erasing gains from the previous session.
Chris McReynolds, head of inflation trading at Barclays and formerly a foreign-exchange trader, said the dollar is outpacing other currencies because inflation and growth prospects in other countries are worse. The U.S. Dollar Index is up 14% over the past year.
“The U.S. economy was much less damaged by Covid than others,” said Mr. McReynolds.
Rick Rieder, BlackRock’s bond chief and head of fixed income, said he is buying the dollar and selling currencies hit by weaker economic growth relative to the U.S., including the euro, the offshore Chinese renminbi and small amounts of the yen.
Currency derivatives markets indicate investors expect the dollar to continue to outperform. Traders at banks said clients are buying options that pay off if the dollar continues to rise:
Call options for the dollar versus the yen became more expensive than puts in March, a reversal in a metric traders use to gauge demand for the dollar.
A strong dollar allows Americans to buy goods from other countries at lower prices. But it can also hurt U.S. manufacturers by making products more expensive for foreigners, and it means U.S. businesses receive fewer dollars for their exports.
Microsoft Corp. said in its earnings report earlier this month that a stronger dollar reduced the software company’s revenue, even though it notched higher profits last quarter.
In the 1970s, inflation and the 1973 Arab oil embargo dragged the greenback down. Europe today is grappling with its own energy-supply shortage and growth concerns, potentially leading to a phenomenon known as stagflation, marked by rising prices and slowing growth, which often prompts investors to sell a currency.
The euro has lost nearly 13% against the dollar during the past year.
Stephen Gallo, European head of FX strategy for BMO Capital Markets, said investors’ perception of how central banks will act is boosting the dollar.
The European Central Bank has yet to raise interest rates, with President Christine Lagarde earlier this month saying it will lag behind the Fed in tightening monetary policy. The Bank of Japan also recently reinforced its commitment to low interest rates.
Interest-rate derivatives show that investors expect the Fed to increase its benchmark federal-funds rate from its current level between 0.75% and 1% to just above 3% next year.
“The central banks more credible at targeting inflation will attract most of the flows,” said Nafez Zouk, an analyst at Aviva Investors. “The Fed has finally signaled it’s taking the inflation problem seriously.”
Another reason for the dollar’s dominance: the consistent outperformance by U.S. assets of European assets. One measure of this can be seen in global stocks: Over the past decade, stocks in the U.S. have earned investors outsize returns, while their European counterparts have remained lower and largely rangebound.
The S&P 500 in December was up more than 400% since 2009, compared with a 137% advance in the Stoxx Europe 600 over the same period.
Keith Decarlucci, chief investment officer of London-based hedge fund Melqart KEAL Capital, who has traded currency markets for more than 30 years, said the dollar’s status as a haven amid geopolitical uncertainty and role as the world’s reserve currency puts it in a stronger position today than in the 1970s, when the U.S. imported more oil and abandoned the gold standard.
But Morgan Stanley and Barclays expect it to fall over the course of the year. Strategists said the currency won’t look as attractive as economic growth picks up in Europe or if inflation in the U.S. sticks above 3%.
U.S. Dollar Index Retreats From 20 Year Highs — But Will DXY Topping Spark A Bitcoin Recovery?
Strong euro and overbought readings could pressure the dollar further, showing signs of topping out — Bitcoin at risk of falling.
The United States dollar index (DXY) retreated broadly from its prevailing bull run in the past two weeks, dropping by up to 3.20% after hitting its two-decade high of 105.
Overvaluation Risks Grip Dollar Market
The U.S. dollar’s correction in the last two weeks preceded twelve months of relentless buying.
To recap, the greenback’s weight against the basket of top foreign currencies grew by around 14.3% in a year, primarily as markets looked for safe havens against the fears of a hawkish Federal Reserve and, more recently, the military conflict between Ukraine and Russia.
Cash balances among the global fund managers grew 6.1% on average since 9/11, a recent survey of 288 asset allocators by Bank of America showed. The report also noted that 66% of asset managers believe global profits will weaken in 2022, prompting them to hold “overweight” cash positions.
“The market has hoarded a huge amount of dollars in recent months,” George Saravelos, strategist at Deutsche Bank, told the Financial Times, adding that it is “leading to a very substantial dollar overvaluation.”
Thus, the U.S. dollar’s latest retreat may have been an interim correction to neutralize its “overbought” conditions, as the greenback’s weekly relative strength index (RSI) readings also suggested, shown in the chart below.
From a further technical perspective, the DXY could decline further toward a rising trendline that, as support, has been capping its downside moves since January 2021, as shown below.
If more selloffs occur, the index is likely to pull back from its current resistance range, with the next downside target at the 0.786 Fib line near 100.
Stronger Euro Prospects
The DXY also pulled back earlier this week as Christine Lagarde, president of the European Central Bank (ECB), set a new and more hawkish policy on May 23.
Lagarde committed to interest rate hikes by September 2022, thus turning away from ECB’s decade-long dovish monetary policy that has resulted in de facto negative interest rates.
As a result, rates in the eurozone would shoot back to zero, the prospect of which has made the euro stronger against the U.S. dollar.
But, even with the ongoing Ukraine-Russia crisis and its access to energy thrown into haywire, the eurozone’s confidence in business growth remains strong, the recent IFO survey shows. That would mean more upside boost for the euro, which could pressure the dollar lower.
“It’s still too soon to say with any confidence that the dollar is now into a weakening trend,” said John Authers, senior editor at Bloomberg Opinion, adding:
“But its decline is another indication that the ‘stagflation and ever-higher rates’ narrative is being rethought.”
EM Currencies Versus Bitcoin
A weaker DXY merely represents its declining weight against foreign currencies. But, a deeper look into the dollar shows weakening purchasing power in a high inflation environment. The consumer price index (CPI) was above 8% as of this April 2022.
As a result, the U.S. dollar, albeit stronger than it was a year ago, has not been able to send emerging market currencies into a tailspin, thus breaking off their widely-watched negative correlation.
Notably, returns on the currencies of developing nations such as the Brazilian real and Chilean peso have been higher than the dollar since January 2022.
Emerging market (EM) currencies tend to underperform when the dollar rises, mainly because investors look at the greenback as their ultimate haven in times of global market uncertainty. But, with commodity prices rising due to the Ukraine-Russia crisis, investors are rethinking their strategy.
Meanwhile, countries increasing their interest rates are also creating a better investment environment for their currencies, says Stephen Gallo, European head of FX strategy for BMO Capital Markets.
Excerpts From His Statement To The Wall Street Journal States:
“Emerging-market central banks are forced to tighten policy to keep pace with the Fed. It’s either that, or capital controls are imposed.”
The ongoing power play between the dollar and the EM currencies has left Bitcoin (BTC) without consideration. Its value has dropped by over 50% since November 2021 and remains heavily with risk-on assets.
However, Bitcoin’s long-standing negative correlation with the DXY has flipped to positive this week. This suggests that a further decline in the dollar markets might not necessarily trigger a BTC price recovery in the near term.
As Cointelegraph recently reported, calls for a $20,000 macro bottom and even much lower are growing louder as Bitcoin struggles to rise back above the $30,000 mark.
Dollar’s Strength Pushes World Economy Deeper Into Slowdown
* Fed Rate Hikes And Strong Dollar Are Hurting Global Growth
* Emerging Economies Are Especially Vulnerable As Capital Leaves
The soaring dollar is propelling the global economy deeper into a synchronized slowdown by driving up borrowing costs and stoking financial-market volatility — and there’s little respite on the horizon.
A closely watched gauge of the greenback has risen 7% since January to a two-year high as the Federal Reserve embarks on an aggressive series of interest-rate increases to curb inflation and investors have bought dollars as a haven amid economic uncertainty.
A rising currency should help the Fed cool prices and support American demand for goods from abroad, but it also threatens to drive up the import prices of foreign economies, further fueling their inflation rates, and sap them of capital.
That’s especially worrying for emerging economies, which are being forced to either allow their currencies to weaken, intervene to cushion their slide, or raise their own interest rates in a bid to buttress their foreign exchange levels.
Both India and Malaysia made surprise rate hikes this month. India also entered the market too to prop up its exchange rate.
Advanced economies haven’t been spared either: In the past week the euro hit a new five-year low, the Swiss franc weakened to hit parity with the dollar for first time since 2019 and Hong Kong’s Monetary Authority was forced to intervene to defend its currency peg. The yen also recently toughed a two-decade low.
“The Fed’s rapid pace of rate hikes is causing headaches for many other economies in the world, triggering portfolio outflows and currency weakness,” said Tuuli McCully, head of Asia-Pacific economics at Scotiabank.
While the combination of slowing US growth and an expected cooling in America’s inflation will ultimately see the dollar’s ascent slow — which in turn will take pressure off other central banks to tighten — it may take months to find that new equilibrium.
So far at least, traders are reluctant to call a peak in the dollar rally. That in part reflects bets at the end of 2021 that the greenback’s gains would fade as rate hikes were already priced in. Those views have since been shredded.
Developing economies are in danger of a “currency mismatch,” which occurs when governments, corporations or financial institutions have borrowed in US dollars and lent it out in their local currency, according to Clay Lowery, a former US Treasury assistant secretary for international affairs who’s now executive vice president at the Institute for International Finance.
Global growth will essentially flatline this year as Europe falls into recession, China slows sharply and US financial conditions tighten significantly, according to a new forecast from the IIF. Economists at Morgan Stanley expect growth this year to be less than half of the pace in 2021.
As rates continue to rise amid on-going global volatility — from the war in Ukraine to China’s Covid lockdowns — that has led investors to leap for safety. Economies nursing current account deficits are at risk of more volatility.
“The United States has always been a safe haven,” Lowery said. “With rising interest rates both from the Fed and from market rates, even more capital could flow into the US. And that could be damaging for emerging markets.”
Outflows of $4 billion were seen from emerging economy securities in April, according to the IIF. Emerging market currencies have tumbled and emerging-Asia bonds have suffered losses of 7% this year, more than the hit taken during the 2013 taper tantrum.
“Tighter US monetary policy will have large spillovers to the rest of the world,” said Rob Subbaraman, head of global markets research at Nomura Holdings Inc. “The real kicker is that most economies outside the US are starting in a weaker position than the US itself.”
Many manufacturers say the high costs they are facing means they aren’t getting much of a dividend from weaker currencies.
Toyota Motor Corp. forecast a 20% decline in operating profit for the current fiscal year despite posting robust annual car sales, citing an “unprecedented” rise in costs for logistics and raw materials. It said it doesn’t expect the weakened yen to deliver a “major” lift.
China’s yuan has slid as record flows of capital pull out of the country’s financial markets. For now, it remains insulated from the wider dollar effect as low inflation at home allows authorities to focus on supporting growth.
But that’s causing yet another source of fragility for developing nations used to a strong yuan offering their markets an anchor.
“The recent abrupt shift in the renminbi’s trend has more to do with China’s deteriorating economic outlook than Fed policy,” said Alvin Tan, a strategist at Royal Bank of Canada in Singapore. “But it has definitely splintered the shield insulating Asian currencies from the rising dollar and precipitated the rapid weakening of Asian currencies as a group in the past month.”
In advanced economies, weakening currencies set up a “tricky policy dilemma” for the Bank of Japan, European Central Bank and the Bank of England, Dario Perkins, chief European economist at TS Lombard in London, wrote in a recent note.
ECB Governing Council Member Francois Villeroy de Galhau noted this month that a “euro that is too weak would go against our price stability objective.”
“While domestic ‘overheating’ is mostly a US phenomenon, weaker exchange rates add to imported price pressures, keeping inflation significantly above central banks’ 2% targets,” Perkins wrote. “Monetary tightening might alleviate this problem, but at the cost of further domestic economic pain.”
The Dollar Is Winning In A Messy Global Economy—And That Matters In The Fight Against Inflation
A stronger U.S. currency could help the Federal Reserve hold down the cost of imported goods.
Despite signals of economic trouble in the U.S., such as soaring inflation, falling stock prices and wavering consumer confidence, one important indicator is flashing American strength: the dollar.
Even as the Dow tumbles, The Wall Street Journal’s dollar index has risen 8% this year. Against China’s yuan, the dollar is up 7%, with much of it in just the past month. Against Japan’s yen it’s up 12% and against Switzerland’s franc it’s up 10%.
The currency move has important economic implications. A strong national currency makes imported goods less costly, which should help to hold down inflation.
That, in turn, makes the Federal Reserve’s job a little bit easier, potentially diminishing its impulse to raise interest rates aggressively to restrain demand and stop the upward move of consumer prices.
Several factors are behind the move. U.S. interest rates are substantially higher than elsewhere. For instance, 10-year Treasury notes yield 2.9% a year, compared with 0.95% for Germany’s bund, 1.7% for the U.K.’s gilt and 0.2% for Japan’s 10-year government bond. The higher return gives investors an incentive to put money in the U.S.
“The Federal Reserve is raising interest rates very quickly and very aggressively compared to other advanced countries,” said Kristin Forbes, an economics professor at the Massachusetts Institute of Technology and a former member of the Bank of England’s monetary policy committee. A stronger currency is the natural offshoot, she said.
The broader story is that economic conditions are even rougher in other places than in the U.S. Europe’s economy has been slammed by the aftershocks of Russia’s invasion of Ukraine.
Meantime, government-imposed lockdowns to tame Covid-19 have gummed up China’s economic-growth machine, while a glut of newly-built housing is hurting banks and households that invested in apartments that are losing value. The Shanghai Composite stock index is down 16% so far this year. Stock indexes in Shenzhen and Hong Kong are down even more.
The International Monetary Fund expects China’s economic output to grow 4.4% this year, half last year’s rate and near projected growth of 3.7% in the U.S. If that forecast is right, it will be the closest the growth rates of the two countries have been since 1989, when China’s government violently cracked down on domestic protesters in Tiananmen Square. Economists at J.P. Morgan estimate the U.S. will grow faster than China in the current April-June quarter, another rare occurrence.
Chinese authorities manage their currency more aggressively than those in most other countries. In the past month they have allowed the yuan to tumble, a sign investors there are moving assets abroad and that China’s leaders want a cheaper yuan to stimulate exports as the domestic economy wobbles.
“The currency is a lever you would expect China to use to support a weakening economy,” Ms. Forbes said.
Back in the U.S., the downside of a strong currency is that it restrains growth by making exports more expensive. The upside is that it restrains inflation. Think of all of the sneakers and kitchen tables the U.S. imports from places like China or Vietnam. The rising dollar makes them less expensive.
That might be especially pertinent now. The cost of imported goods soared at double-digit rates in 10 of the past 12 months, according to Labor Department data. Covid-19 disrupted global supply chains and kept Americans at home, where they ramped up durable goods spending rather than visiting movie theaters, hotels or restaurants.
A higher dollar should hold down import costs. Businesses that rely on imported components may choose to increase profits on domestic sales rather than lower their prices, but some of the cost savings should eventually be passed on to consumers. Economist Owen Humpage estimated in 2015 that a broad and sustained 1% increase in the dollar reduces non-oil import prices by 0.3% over six months.
When the Fed seeks to bring down inflation, it relies not only on the direct effect of increased short-term interest rates, but also on the knock-on effects of lower stock prices, higher long-term interest rates on mortgages and corporate debt, and the strong dollar.
The combined effects of their movements are summed up in an index of financial conditions maintained by Roberto Perli, head of global policy analysis at Piper Sandler, an investment firm. That index shows financial conditions are as restrictive as in 2012, not long after the 2007-2009 financial crisis, he said.
That’s a big reversal, Mr. Perli said. A year ago, low interest rates, booming stocks and a modestly valued currency meant financial conditions were more supportive of economic growth than they had been at any time in more than two decades.
The Fed so far this year has raised short-term interest rates by 0.75 percentage point. A Goldman Sachs financial conditions index has moved as if the Fed had already raised rates by 2.25 percentage points, thanks to the amplifying effects of the currency and stocks.
“The Fed has to be happy with the fact that financial conditions have tightened,” said William Dudley, former president of the Federal Reserve Bank of New York. “They’re getting traction.” That doesn’t mean the central bank can stop raising rates, but it does take pressure off to move even more aggressively than planned. “They still have to do what they said they’re going to do,” he said.
US Dollar Strength Mimics 2020 Coronavirus Crash
The U.S. dollar runs the show behind the scenes as Easter weekend sparks pain for Bitcoin bulls.
DXY Faces “Do Or Die” Decision
One yardstick for the traditional economy is meanwhile at what could turn out to be a crucial inflection point.
The U.S. dollar currency index (DXY), a key measure of dollar strength, is facing a choice between continued upside and a major correction as it lingers at the 100 points threshold.
It was a long time coming — the last time that DXY was so bullish was in April 2020 at the height of the coronavirus market shock.
DXY has a habit of running in opposition to Bitcoin price, and while that inverse correlation has broken down to some extent in the past year, the odds remain that a major drawdown for USD would be a benefit to BTC.
“If we see the DXY roll over again at this trendline be prepared for a strong send,” markets commentator Johal Miles summarized on April 17.
“Naturally the FED has key importance here, as any change of course will put pressure on the dollar.”
An accompanying chart highlighted the impact of DXY retracements on BTC/USD since late 2014.
On April 18, however, there were no real signs of a reversal, and a brief dip in DXY last week — which coincided with an equally brief rally in BTC — was soon mitigated entirely.
“Many calling for corrections on DXY but still looking bullish,” popular chartist Jesse Olson added on the day.
Exchange Balances Lowest Since Mid-2018
What Are The More Bullish Signals Coming From Bitcoin In The Current Environment?
Look no further than exchanges for one, as their declining balances point to sustained determination to “hodl” BTC.
According to the latest data, not only are buyers continuing to move large tranches of coins off exchanges into cold storage, but those exchanges’ overall BTC balance is now at fresh multi-year lows.
Figures from on-chain analytics firm CyptoQuant confirm that the balance of 21 major exchanges was 2.274 million BTC as of April 17. The last time that the level was so low was in July 2018.
The impact of such buyer trends has yet to be seen in practice. Despite the available supply declining, a real scramble for BTC has not yet occurred, while sellers have conversely sought to exit at levels approaching $50,000 in recent weeks.
The result is a narrow scope of movement for BTC price action as buyers and sellers act in a closely-guarded range. Ki Young Ju, CEO of CryptoQuant, noted the phenomenon playing out last week.
As Cointelegraph reported, meanwhile, the likely source of the exchange supply sapping is institutional, rather than retail investors.
Crypto Sentiment Diverges Into “Extreme Fear”
Is Crypto Market Sentiment Truly Indicative Of A Shock In The Making?
Bitcoin has been praised as the “only” truly honest market available to investors, and its decline from all-time highs thus foreshadowed this year’s inflationary environment hostile to stocks, commodities and more.
Should that hold true, the current state of the Crypto Fear & Greed Index may give investors fresh pause for thought.
At 24/100 as of April 18, the Index is back in its “extreme fear” zone, having more than halved since the start of April.
By contrast, the traditional market Fear & Greed Index is “neutral,” a zone in which it has stayed since exiting the “fear” zone late last month.
While equally famous for its fickle nature, crypto market sentiment could, nonetheless, be a warning for those hoping that the good times will continue regardless.
Macro Has Plenty Of Surprises Up Its Sleeve
With Western markets closed until April 19, there is little scope for a macro-induced move on crypto.
Asian markets were mostly flat throughout April 18, with the Hong Kong Hang Seng up a modest 0.67% and the Shanghai Composite Index conversely down 0.67% at the time of writing.
Global financial markets, however, are anything but unremarkable this month, as uncharted territory defines the current setup. Surging inflation coupled with rock-bottom interest rates is one such novel feature.
For markets commentator Holger Zschaepitz, the focus was on the international bonds markets, these having wiped $6.4 trillion off their value since hitting all-time highs last year.
“The biggest bond bubble in 800 y[ea]rs continues to deflate after rising U.S. inflation data (CPI & PPI) shake up the bond markets. The value of global bonds has dropped by another $400 b[illio]n this week, bringing total loss from ATH to $6.4 t[rillio]n,” he commented.
Japan’s central bank balance sheet expansion, which Zschaepitz previously called the greatest monetary policy experiment “in history,” is meanwhile delivering fresh phenomena in the form of spiking inflation.
Inflation is a double-edged sword for Bitcoiners, the tide of rising prices and central bank reactions set to put serious pressure on both stocks and risk assets at first. Only later on, various theories argue, will the tide turn in favor of Bitcoin as a store of value.
“The contrast between high equity prices and tame commodities on a 10-year basis may point to greater odds of decreases for stocks,” Bloomberg Intelligence senior commodities strategist Mike McGlone, a proponent of that perspective, wrote in his latest update last week.
Surging Dollar Raises Possibility of Parity With Euro
Europe’s economic misfortunes have sent the euro not far from equal value with the dollar for the first time in nearly two decades.
A roughly 7% slide in the euro against the dollar this year is breathing new life into a two-decade old question on Wall Street: Will this be the year the currencies finally reach parity?
The euro fell as low as around $1.035 earlier this month, down from the $1.137 level at which it ended last year. It finished Friday at about $1.057, putting it a little more than 5% away from reaching parity, or equal value with the dollar.
The last time the euro and dollar reached parity was late 2002, though Europe’s common currency has had brushes with the threshold in the more recent past.
In late 2016, the euro careened toward parity after former President Donald Trump won the U.S. presidential election and as traders anticipated a series of interest-rate increases by the Federal Reserve. Those bets, however, unraveled in 2017 after faster-than-expected growth in Europe.
Some market watchers say the possibility of parity is realistic this time as traders contend with a hawkish Fed, the ripple effects into Europe from Russia’s war in Ukraine and an economic slowdown in China.
Many economists and investors expect higher energy prices and supply disruptions stemming from the war to depress growth in Europe. Any kind of weakening demand in China for European goods could weigh heavily on the region, too.
Meanwhile, the Fed has begun an aggressive campaign to lift interest rates, providing a further boost to the dollar, which has emerged as one of the predominant havens for investors this year.
Higher interest rates typically support the dollar by making U.S. assets more attractive to yield-seeking investors. The European Central Bank, meanwhile, is expected to continue to lag behind the Fed in tightening monetary policy.
Those factors have sent the euro and dollar swinging wildly this year—including Thursday, when the euro rose 1.2% against the dollar, its biggest jump in more than two months. The euro reversed some of those gains Friday, when it fell 0.2%.
Even so, the euro is having its worst start to a year since 2015, according to Dow Jones Market Data. That has forced some analysts and investors to revise expectations for parity in recent weeks.
“For us, the odds of [the euro and dollar] trading at parity have gone from 30% at the start of the Ukraine war to 75% now,” said Viraj Patel, global macro strategist for Vanda Research. “There’s very little that small ECB rate hikes can do to arrest the [euro’s] decline.”
Considered a psychological level for the currency pair, euro-dollar parity also has important implications for local economies and consumers’ wallets. For Americans traveling abroad this summer, a weak euro means their dollars can go further.
For European economies, a weak euro makes imports more expensive, which can ripple to create higher local prices. That could put further stress on economies at a time when European countries—and others around the world—are already dealing with soaring inflation.
“Broadly speaking, a weaker currency has an impact in accelerating inflation,” said Jane Foley, head of foreign-exchange strategy at Rabobank. But, she noted, “It’s not necessarily the levels [at which the currencies are trading] that make things difficult. It’s the uncertainty and the volatility—the pace at which we’re moving—that is creating difficulties for policy makers to try to gauge things like inflation.”
A weaker euro can also make euro-denominated assets—such as stocks—less attractive. The benchmark Stoxx Europe 600 index has fallen by 12% this year, less than the 18% fall in the S&P 500. But in dollar terms it is neck-and-neck with the U.S. index.
Investors’ jitters have been apparent elsewhere: Earlier this month, the gap between yields on Italian and German benchmark government bonds rose to 2.007 percentage points, its highest level since May 2020, according to Tradeweb.
On Friday, that spread rose above 2 percentage points again. A widening gap between Italian and German yields is typically viewed as a barometer of financial stress in the region.
Not all market watchers are convinced that euro-dollar parity is likely. The currency has yet to plunge below what is considered a key technical level for the euro—the $1.034 intraday level that the euro fell to in early 2017.
“There’s some technical psychology to it,” said Paul Ciana, head of FX technical strategy at Bank of America, noting that the euro bounced higher after falling to its intraday low of about $1.035 last week. However, he noted, “maybe this time [parity] actually happens because people are less positioned for it.”
Recent data from the Commodity Futures Trading Commission shows that leveraged funds as of last week held a modest net short position against the euro—but are less bearish against the currency than they were at points last year.
“When I was looking at the euro positions, the first thing that came to mind was, ‘Oh it’s got further to go,’” said Ms. Foley, who has a forecast of $1.03 for the euro in the coming months.
“I think if we’re moving into an environment where you have these risks building for the eurozone—largely due to energy security but also the China slowdown—there is the possibility that die hard bulls will be giving up,” she said.
Weaker Dollar Lifts Bitcoin To $30.7K As Analyst Eyes 60% BTC Dominance
Macro conditions flip to reduce pressure on risk assets, as one view gives Bitcoin bears $14,000 capitulation “hopium.”
Bitcoin (BTC) hit 48-hour highs overnight into May 20 as U.S. dollar weakness gave bulls some much-needed respite.
Dollar Strength Declines After 20-Year Record
Data from Cointelegraph Markets Pro and TradingView recorded a high of $30,725 for BTC/USD on Bitstamp.
Still struggling to flip $30,000 to reliable support, the pair nonetheless avoided a deeper retracement, helping calm fears that last week’s $23,800 capitulation event did not mark the bottom.
The U.S. dollar index (DXY) provided the background to Bitcoin’s relatively solid performance, this coming off two-decade highs to dip 2% in a week.
This appeared to relieve some pressure on stock markets, the S&P 500 finishing May 19 down a more modest 0.58% compared to previously in the week, the Nasdaq 100 less.
While treading water more than 50% below its all-time highs, the largest cryptocurrency had punished latecomers to the market, one analyst noted.
“Today, newbies who joined last year are in -34% loss,” Ki Young Ju, CEO of analytics platform CryptoQuant, wrote in a series of tweets on the day.
Ki highlighted a chart of bands of unspent transaction outputs (UTXOs) showing the age of investments. Those who had only experienced one “bear cycle” before were now down 39%, he concluded, while older coins were still in profit.
“So here’s hopium for bears. If $BTC crashed so hard due to the macro crisis and all Bitcoiner institutions go underwater, it could go $14k based on historical MDD,” he added.
As Cointelegraph reported, multiple predictions of a major BTC price retracement, some under $14,000, continue to circulate.
Altcoins Roll Over
Meanwhile, attention focused on Bitcoin’s increasing market presence over altcoins.
After the Terra LUNA debacle, the mood had turned cold outside BTC, and now, signs were there that alts could cede dominance rapidly.
At 44.8%, Bitcoin’s share of the overall cryptocurrency market cap was at its highest since October 2021 at the time of writing.
“We could see dominance rally all the way back to 60%,” popular Twitter account IncomeSharks forecast.
“This is why you need to be cautious on alts and trade them with tight stops. There’s a good chance we could see money leave alts and start going back to BTC.”
60% BTC market dominance would represent a level not seen since March last year.
“Most alts I’ve been watching haven’t been able to break their H4 trends despite yesterday’s move on BTC,” fellow popular analyst Pierre warned.
“Would still expect most of them to die twice harder if BTC was to remain stuck within this same range, or resolve to the downside.”
Dollar Heads Toward Monthly Loss As Investors Scale Back Bets
The dollar suffered losses last week and was headed toward its first monthly decline in five months on Monday as investors have eased their bets that rising U.S. rates will result in additional gains.
The dollar was slightly weaker on the euro in the Asia session at $1.0728, which is just above a five-week low. It took a dip last week of about 1.5% on the common currency.
The Australian and New Zealand dollars stayed firm while the yen was slightly weaker at 127.28 per dollar.
The Aussie remained near a three-week high at $0.7161. The kiwi did the same at $0.6536.
“The dollar can fall further this week. Were it not for China’s lockdown, the global outlook would be brighter, and the dollar lower,” Joe Capurso, head of international economics at the Commonwealth Bank of Australia in Sydney, said.
The dollar index reached a 20-year high of 105.010 earlier this month and stayed at 101.660 on Monday.
China’s yuan held at 6.7210 per dollar in offshore trade after the country eased coronavirus restrictions.
Stocks Struggle, Dollar Gains As Inflation Hits Records
Stocks and bonds struggled in Asia on Wednesday while the U.S. dollar rose as investors worried about inflation and the hit that containing it with rate rises will bring to global growth.
Shanghai emerged blinking from two months of lockdown but as data showed steep falls in factory activity across Asia from the withering of China’s demand, relief was short-lived.
MSCI’s broadest index of Asia-Pacific shares outside Japan was dragged 0.7% lower by a 1% drop for Hong Kong’s Hang Seng index. Japan’s Nikkei rose 0.6%.
S&P 500 futures were last up 0.4%, but had given up larger early gains. Euro STOXX 50 futures rose 0.5%, as did FTSE futures.
Soaring food and energy costs drove eurozone inflation to a record-high 8.1% in May, Tuesday figures showed, stoking concern about rate rises not just in Europe but globally.
“Markets are pricing in rate hikes in June from the UK, U.S., Sweden, Australia and Canada,” said Societe Generale analyst Kit Juckes.
“The more the markets focus on the inflation data and central bank action, the more likely it is that we have a bumpy start to the summer in risk sentiment and a strong one for the dollar.”
The dollar has arrested a three-week slide and made a two-week high of 129.23 yen late in the Asia session. It rose on the euro, sterling, Aussie and yuan and last traded at $1.0708 per euro and $0.7170 on the Aussie.
Two-year German bund yields hit their highest in over a decade on Tuesday and benchmark 10-year Treasury yields rose 10 basis points (bps). They were steady at 2.8694% late in Tokyo trade. [US/]
The Bank of Canada is expected to raise its benchmark target rate 50 bps to 1.5% when it meets later in the day.
St. Louis Federal Reserve President James Bullard and New York Fed President John Williams are also due to speak on Wednesday and will be watched for clues on the outlook.
The U.S. Federal Reserve begins shrinking asset holdings built up during the pandemic on Wednesday. Traders expect it will raise rates by 50 bps at meetings this month and next and they are unsure and increasingly worried about after that.
“We’re in this kind of twilight zone now where it’s just very difficult to get a handle on what the Fed are going to do after the July meeting,” said Bank of Singapore analyst Moh Siong Sim.
“Depending on who says what and how the data plays out there will be a lot of gyrations over the next few weeks.”
Uncertainty also looms over the shape of China’s recovery from lockdown. Joggers came back to their stamping grounds on the banks of Shanghai’s Huangpu River, but beat cops wore full hazmat suits and nerves about a return to lockdown ran high.
Stocks in Hong Kong and Shanghai slipped.
In commodity markets oil was knocked from an almost three-month high on Tuesday after the Wall Street Journal reported that oil producing nations were considering excluding Russia from a production deal, paving the way for extra output. [O/R]
Brent crude futures steadied at $116.09 a barrel.
The stronger dollar pushed spot gold 0.3% lower to $1,830 an ounce. Bitcoin clung to early-week gains at $31,500.
Dollar Gains 1.15% To 130.15 Yen
Dollar/Japanese yen: 130.15 Japanese yen per dollar (0.0077 dollar per Japanese yen)
* Today The Dollar Gained 1.15% Vs. The Japanese Yen
* Largest One Day Percentage Gain Since Thursday, April 28, 2022
* Up For Four Straight Sessions
* Up 2.41% Over The Last Four Sessions
* Largest Four Day Percentage Gain Since Tuesday, April 19, 2022
* Longest Winning Streak Since Tuesday, April 19, 2022 When The Market Rose For 13 Straight Sessions
* Up Seven Of The Past Nine Sessions
* Highest Five Pm New York Rate Since Tuesday, May 10, 2022
* Off 0.51% From Its 52-Week High Of 130.819 Hit Thursday, April 28, 2022
* Up 19.38% From Its 52-Week Low Of 109.027 Hit Tuesday, Aug. 3, 2021
* Rose 18.78% Vs The Japanese Yen From 52 Weeks Ago
* Year-To-Date The Dollar Is Up 13.08% Vs The Japanese Yen
Data based on 5 p.m. ET values
How A Strong Dollar Hits Microsoft, Other Big U.S. Companies
A more valuable dollar is a benefit for U.S. consumers but makes it harder for companies to cash in on foreign sales
Microsoft Corp. on Thursday cut its sales and earnings guidance, citing the U.S. dollar’s gains in foreign-exchange markets. Here’s why the dollar has climbed so much this year and what that means for companies and stocks.
Why Is The U.S. Dollar Rising?
The U.S. Dollar Index, which tracks the currency against a basket of others, has risen roughly 13% over the past year, defying strong inflation to reach levels not seen since the early 2000s.
In part, that is because investors around the world have been drawn to the U.S. as a source of relative economic strength and stability.
Russia’s war in Ukraine and China’s Covid-19 resurgence have rattled markets, hitting supplies of key commodities and lifting energy prices in a threat to economies world-wide.
When investing in U.S. stocks and bonds, foreigners must usually use dollars, driving up the currency.
What Are The Consequences Of A Stronger U.S. Dollar?
A stronger national currency has benefits and drawbacks for the country that issues it. On the plus side, Americans are seeing their money go farther when they buy goods and services from overseas. Imports become cheaper. A cup of espresso in Paris or a bowl of noodles in Tokyo cost less, in dollar terms, than before.
On the other hand, the stronger dollar means that American products are less affordable to foreigners. That makes it harder for people from other countries to visit the U.S., hurting hotels and other tourist-dependent industries. By the same token, the dollar’s strength also cuts into international sales for all kinds of American businesses.
Why Is Microsoft Suffering?
As a global provider of everything from office software and cloud-computing services to laptops and videogame consoles, Microsoft gets most of its profits from abroad.
In the latest fiscal year, the company’s pretax foreign income was $36.1 billion, compared with $35 billion domestically. That outsize share of international business means that a strengthening dollar weighs on the company’s operations.
In April, the rising dollar was already rearing its head as a concern. Microsoft Chief Financial Officer Amy Hood told analysts that in the latest fiscal quarter, foreign-exchange effects reduced the company’s sales by $302 million. Total revenue in the quarter was $49.4 billion.
On Wednesday, Microsoft sent up another red flag about the impact of dollar strength, cutting its outlook for revenue and profit. The company told investors that it now expects foreign-exchange moves to reduce sales by $460 million more than it had previously anticipated in the current quarter. Profit will suffer too, Microsoft warned.
What Are Other Companies Saying?
A variety of U.S. companies that sell products abroad face a similar dynamic. Other technology companies are a prime example. Salesforce Inc. cited the dollar’s strength this week when it cut its annual sales outlook, doubling its estimate of the projected currency impact on revenue to $600 million.
Drug companies that sell medicine and medical products in international markets have also taken a hit. In late April, pharmaceutical company AbbVie Inc. said foreign-exchange effects dented sales by 1.3% in the first quarter of this year—and that was before the dollar crested at recent highs last month. For the full year, AbbVie forecast that the rising dollar would hurt sales by 1.4%.
Microsoft Sounds The Alarm About Dollar Strength’s Negative Impact On Software Stocks
* The Strong US Dollar Is Expected To Weigh On Software Profits
* Microsoft And Salesforce Have Warned Of Dollar-Related Drags
Software makers that have been battered amid this year’s stock slump were dealt another blow this week when Microsoft Corp. warned of even more headwinds coming down the pike.
The world’s largest software maker cut its profit forecast for the current quarter on Thursday and blamed the surging US dollar for an upcoming drag on its earnings to the tune of $460 million.
The company’s rare mid-season revision took markets by surprise and briefly sent futures on the S&P 500 Index tumbling.
Microsoft and other large US software makers such as Oracle Corp. and Adobe Inc., have complex global operations and higher exposure to foreign currencies. The US Dollar Index has risen more than 7% off a January low, and last month hit its highest in two decades.
The more expensive dollar is bound to add to pressures already threatening the companies’ margins such as higher costs.
“A strong dollar will be a recurring theme across many large software companies, as most generate over one-third of their sales outside the US,” said Anurag Rana, senior analyst with Bloomberg Intelligence.
Soaring U.S. Treasury yields and expectations of tighter monetary policy from the Federal Reserve have caused investors to flee software stocks with pricey valuations and whose profits are expected to be delivered far in the future.
The iShares Expanded Tech-Software Sector ETF is down 26% in 2022, including a drop of 2.3% in Friday’s session.
A Goldman Sachs basket of the priciest software names is down more than 45%, while the broad S&P 500 Index is down 14%. Microsoft fell 1.7% on Friday and ended the week with a 1.2% decline.
Wall Street has been encouraged by strong financial results from software makers this earnings season. Salesforce Inc. this week gave a bullish full-year forecast but said results were hurt by the dollar’s strength, and warned that it expects the issue to extend into the second quarter.
Companies with larger exposure to currencies like Salesforce will have to look into hedging strategies to protect against the dollar strength, said Brendan McKenna, a strategist at Wells Fargo.
He sees the dollar bulking up against most developed countries’ currencies, as well as those from emerging markets, with few exceptions.
For now, analysts have remained sanguine about profits lost to foreign-exchange rates, focusing instead on strong fundamentals that point to the group’s resilience in the face of slowing economic growth.
But for some investors, there are still too many risks to justify piling back into software stocks despite more attractive prices.
“They’re more attractive than they were, but we won’t chase the quality names lower thinking they’re bargains yet,” Stephen Hoedt, managing director of equity research at Key Private Bank. “Cheap can quickly become cheaper in a rising-rate environment.”
Dollar’s Climb Stalls Amid Mixed Economic Signals
Behind the recent slip in the U.S. currency is a subtle shift in the economic landscape.
A run of mixed economic data is dragging on the U.S. dollar, stalling a rally that has rippled through the economy and financial markets.
The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, is around 2% off its May peak and fell 1.1% last month. That decline broke a steady march that brought the dollar to multidecade highs. The index rose 0.6% last week, breaking a two-week losing streak.
Behind the slip has been a subtle shift in the economic landscape. According to recent economic reports, American consumers are still spending money at a rapid pace, while employers keep adding jobs, extending the trends that had helped lift the dollar over the past 12 months or so.
Yet there have been signs of weakness elsewhere. Wage growth has moderated from last year, and consumers have been able to sustain their spending only by dipping into savings. The U.S. service sector, which includes restaurant dining and travel, slowed its pace of expansion in May, and sales of new homes in April posted their biggest drop in nine years.
Overall, the data has clouded some asset managers’ outlook of the U.S. economy. They are now wary that the Federal Reserve might have to slow the pace of expected interest-rate increases. That might be welcomed by stock investors, who are acutely aware of the risks that rising rates pose for highly valued shares, but its meaning would be murkier in currency markets.
Investors typically buy currencies linked to countries where central banks are raising interest rates to rein in a hot economy.
Investors expect the Fed to lift rates by a total of a percentage point in June and July, but what will follow is harder to determine. As a result, traders now contend that the dollar is more sensitive than usual to economic releases on the horizon.
“The market went through six weeks of thinking the sky’s the limit for the Fed,” said Steve Englander, head of North American macro strategy at Standard Chartered. Now, he said, “I think the dollar has topped out.”
The muddied outlook represents a shift in markets, after investors bet that a rapid pace of rate increases would drive the dollar higher throughout the year. Many expected a strong dollar to hurt U.S. multinationals, by making their products more expensive for foreigners, with companies including Microsoft Corp. noting a strong dollar’s hit on revenue in recent reports.
JPMorgan analysts say the dollar’s rise is hurting the U.S. manufacturing sector, which is slowing hiring to compensate for fewer exports.
In the coming week, investors will scrutinize data on the American consumer and Friday’s inflation numbers for clues regarding the state of the economy and the trajectory of the stock market.
Lower inflation numbers could ease pressure on stocks and hit the dollar more, presaging a more gradual approach from the Fed. The Bank of England sparked sharp declines in the pound by signaling caution when it raised rates in May.
Investors are now watching U.S. data for signs of similar slowing. Last week, the Labor Department reported that the economy added 390,000 jobs in May—above the 328,000 expected by economists. Still, the unemployment rate remained at 3.6%, instead of falling to 3.5% as expected. The monthly increase in average hourly earnings was 0.3%, below the 0.4% consensus forecast.
Foreign-exchange markets have been their most volatile in over a decade after a surge in the dollar sent other currencies tumbling, and as central banks across the globe tackled soaring inflation. The WSJ Dollar Index’s recent decline pared this year’s gain to about 6%.
Currencies followed moves in short-term rates, which swung rapidly in March as investors bet the Fed would raise rates in increments of a half-percentage point or more through at least its July 26-27 meeting. The yield on the benchmark two-year U.S. Treasury note increased by nearly 0.9 percentage point in March alone, its biggest monthly climb since 1989.
Investors are now looking to September, when the central bank is to convene with several months of 2022 data. With officials largely united on the need for half-point increases at the Fed’s June and July policy meetings, recent comments from Fed officials show the debate has shifted to what should happen next. Traders say the dollar is sensitive to any scaling-back of the rate path.
One thing investors are watching is the housing market, trying to gauge the impact of tighter lending conditions. There are signs the U.S. market is cooling as rising mortgage-interest rates make homeownership more expensive. The average rate on a 30-year fixed-rate mortgage was 5.09% last week, up from 3.1% at the start of the year, according to Freddie Mac.
Swings in the stock market have made a dent in investment accounts. Higher energy costs could constrain consumer spending, denting growth and hurting the dollar.
Andrzej Skiba, head of the BlueBay U.S. fixed-income team at RBC Global Asset Management, is short on the dollar, betting on a decline in its value against other currencies. But he thinks recent concern regarding a recession has gone too far and would consider buying on the dips.
“It is not clear that we have seen the end of the secular supremacy of the U.S. economy,” said Mr. Skiba.
In The Oil Market, The Strong Dollar Is The World’s Problem
Crude is trading at a record in many local currencies. That will eventually lead to demand destruction.
Just over 50 years ago, at a meeting of the world’s top economic powers, US Treasury Secretary John Connally shocked his counterparts by proclaiming the dollar “is our currency, but it’s your problem.” Back then, America wanted a cheaper currency, forcing others to revalue theirs.
Half a century later, the global economy faces the opposite challenge: The greenback is hovering at a 20-year high against its fellow major currencies, creating a huge problem for everyone outside America buying dollar-denominated goods. And no commodity is more important than crude oil.
Since Connally made the dollar everyone else’s trouble, the greenback has become king of the global energy and commodity markets. The price of nearly every raw material the world consumes today, from oil to wheat to copper, is set in dollars. Even tea, the quintessential British beverage, is priced in the US currency, rather than sterling.
Typically, a strong dollar means weaker commodity prices — and vice versa. The commodity-dollar relationship tends to act as a cushion for the global economy with one offsetting the other, which is particularly important for poorer countries. The last time the world faced surging oil prices was paradigmatic of the symbiosis.
In 2008, the cost of Brent surged to an all-time high of $147.50 a barrel, straining the finances of many nations. But that same year, the dollar plunged to a record low against the currencies of the US’s major trading partners, easing some of the pain. For many importing nations, oil became expensive, but not exorbitantly costly in local currency.
That historical dollar-oil price relationship now appears to be broken. Crude has risen 70% in the past year, and currently trades at about $120 a barrel. At the same time, the dollar has gained 10% since mid-2021. That’s creating balance-of-payments crises in many oil-importing nations, particularly in Africa, Latin America and Asia.
Malawi, one of the poorest nations in Africa, recently devalued its currency by 25% in a single day. Sri Lanka, among the poorest Asian countries, is on the brink of economic collapse.
“The divide between the prosperous and the countries that have a lower ability to pay for commodities is becoming extremely stark,” Mike Muller, head of Asia at Vitol Group, the world’s largest oil trading house, said on Sunday. Even those who can afford to pay sky-high prices in local currency, such as Europe and Japan, are suffering via increased inflationary pressures.
While Brent is about 20% below that 2008 all-time dollar high, it’s changing hands at record levels when expressed in local currency for countries accounting for roughly 35% of the world’s oil demand. India, the world’s third-largest oil consumer behind the US and China, is paying about 45% more than it was 14 years ago due to the steep depreciation of the rupee against the dollar.
The euro zone currently pays about 111 euros ($119) per barrel, compared with 93.5 euros in July 2008. The UK faces a similar problem: Brent peaked at about 74 pounds ($92) per barrel in 2008; today, it’s almost a third more expensive at 95 pounds. With the yen down to its weakest against the dollar in two decades, Japan is also hurting. The list of nations struggling to meet their energy bills goes on and on.
Beyond the domestic economic aftershocks, record high oil prices in local currency matter for the energy market itself. Oil traders are looking for signs of demand destruction — the point at which higher prices lead to reduced consumption. For now, oil demand growth has remained robust, boosted by pent-up consumption as the world emerges from the pandemic.
But with a significant chunk of the world already facing record prices, demand will soon suffer. Analysts at Goldman Sachs Group Inc. reckon that the strength of the US dollar is adding an average of about $20 a barrel extra when measured in local currencies, “to reach levels equivalent to $150/bbl Brent.”
For the OPEC+ oil cartel, the broken relationship between crude and the greenback delivers a windfall. In 2007, at an OPEC summit in Riyadh, oil producing countries worried about a dollar collapse.
With the Federal Reserve poised to raise interest rates further and faster than its central banking peers, the US currency looks set to continue riding high — another reason for the oil cartel to work harder to put a lid on prices.
Wall Street Sends BTC Price To $30.8K As Latest US Dollar Uptick Fails
U.S. dollar strength is waning as traders hope for critical levels to break to exit Bitcoin’s “no trade zone.”
Bitcoin (BTC) showed strength at the June 8 Wall Street open as impatient traders waited for a trend to emerge.
Bitcoin still in “no trade zone”
Data from Cointelegraph Markets Pro and TradingView showed BTC/USD jumping to near $30,850 after the opening bell, helping claw back some of the ground lost in an overnight correction.
Choppy trading conditions prevailed within a familiar range on the day, however, leading to both long and short traders seeing increased risk on low timeframes.
For popular trader Crypto Chase, this was a prime period for the transfer of value to “smart money” — away from small-volume speculators and those with “weak hands.”
A prior Twitter post had argued for a hands-off approach until a decisive level had been breached.
Fellow trader Crypto Tony argued that $29,700 needed to hold as support for a further upward momentum to enter.
“Simple playing field for Bitcoin,” Cointelegraph contributor Michaël van de Poppe added.
“Break through $31.5K = $32.8K and/or $35K. Support zones for longs probably $30K and $29.3K still. In between = no trade zone.”
Stocks were flat at the time of writing, with 48 hours still to go until the latest United States Consumer Price Index (CPI) readout.
Laying out the possible reactions from BTC/USD, Twitter account PlanC identified between 8% and 8.3% as having a “neutral” effect.
This CPI print on June 10, will be very interesting.
> 8.3%, short-term all markets tank (Bearish)
8% – 8.3%, slight dump or pump (Neutral)
— Plan©️ (@TheRealPlanC) June 7, 2022
Japanese Yen Losses Contrast With Weaker Dollar
Elsewhere in macro, the poor performance of the Japanese yen versus the U.S. dollar was again on crypto commentators’ radar.
Even as the U.S. dollar index (DXY) failed to continue its rally above 20-year highs, USD/JPY reached levels not seen since the start of 2002.
BTC/USD traded in a more modest territory near local highs from before May’s crypto dip, still far from its record peak, as with the dollar seen in November 2021.
Japan’s central bank continues a policy of quantitative easing, in stark contrast to both the U.S. and European Union, both of which are aiming to reduce their central banks’ balance sheets.
The third largest currency in the world is falling off a cliff vs. the USD.
— Stack Hödler (@stackhodler) June 8, 2022
“Turns out that the monetary experiment in Japan is not going too well,” analyst Jan Wüstenfeld responded.
Soaring Dollar Is ‘Only Safe Haven Left’ After Hot US Inflation
* The Dollar Is On Track For Its Biggest Gain Since May 5
* Pound Leads G-10 Losses As EM FX Gauge Sinks To May Lows
Investors are rushing to buy dollars after US inflation accelerated to a fresh 40-year high last month, adding pressure on the Federal Reserve for more aggressive interest-rate increases.
A key gauge of the dollar jumped 0.8% on Friday, heading for its biggest gain in five weeks after US consumer prices quickened 8.6% from a year earlier, topping estimates.
The greenback’s strength sent nearly all of its Group-of-10 and emerging-market peers tumbling. MSCI Inc’s developing currency index is on track for its worst day since early May, led by losses in Brazil’s real and South African rand.
“Markets are shifting expectations toward a higher terminal rate for the Fed. That’s supportive for the US dollar and bad for risk assets,” said Bipan Rai, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce. “The need to take settings into restrictive territory has increased.”
The British pound led losses among Group-of-10 currencies, weakening by as much as 1.4% to the lowest in three weeks, as traders bet the local monetary authority will lag global peers in the race to increase rates. The South African rand, a bellwether for risk sentiment within the developing world, lost more than 2.3% on Friday, the most in over a month.
The rush for dollars comes as swap contracts referencing Fed policy meeting dates repriced to levels suggesting that the US central bank — which was already expected to raise rates by half-a-point in June and July — will do so again in September, with some risk of a three-quarter point increase in months to come.
That contrasts with a more dovish stance held by Bank of Japan, which has sapped some safe-haven appeal from its currency.
The Japanese yen edged higher against the dollar on Friday, but still traded near a 20-year low. The Swiss franc is also failing to lure traders, falling as much as 1% Friday for a sixth straight decline versus the greenback.
“With US rates much higher and stocks way lower, the dollar is a safe-haven trade,” said Brent Donnelly, president of Spectra FX Solutions. “The only safe haven left is the US dollar.”
Dollar Reaches Three-Week High After Inflation Data
The dollar rose to a three-week high after May’s U.S. inflation data exceeded market expectations.
The U.S. Dollar Index, which tracks the currency against a basket of others, rose to 103.939, its highest level since mid-May, after the data from 103.523 beforehand.
Consumer prices rose 8.6% year-on-year and 1% month-on-month in May. Economists polled by the Journal had forecast rises of 8.3% and 0.7%, respectively.
“Basically, inflation isn’t near its peak levels, and unfortunately, there is a lot more of these soaring numbers to come,” AvaTrade analyst Naeem Aslam said in a note. Higher inflation means more monetary policy tightening by the Federal Reserve, he says.
Dollar Surge With Fed Bets As Recession Risk Grows
* Treasury Yields Climb Across Curve To Multi-Year Highs
* Bloomberg Dollar Gauge Set For Biggest Increase Since 2020
The hottest US inflation in four decades will push the Federal Reserve to raise interest rates more aggressively this year, and a recession may not be far behind.
Those are the dramatic signals coming from markets, which on Monday saw yields surging across the board: 10-year rates hit the highest since 2011, while their two-year equivalents jumped to levels last seen before the global financial crisis and 30-year yields climbed to the highest in more than three years.
Bloomberg’s dollar gauge headed for the biggest advance since the height of the Covid pandemic, adding to a backdrop that sparked a spiral in risky assets.
Meanwhile, a closely-watched part of the US yield curve inverted — backed by leaping Treasury futures volumes — amid concern that tighter monetary policy will take a bigger toll on economic growth. Data on Friday showed consumer prices accelerated to a 40-year high.
The surge in yields and fall in share prices “makes sense in wake of the astoundingly strong CPI we had on Friday,” Matthew Hornbach, global head of macro strategy at Morgan Stanley said on Bloomberg Television.
“Inflation is really the Achilles’ heel of risk markets. This economy is going to require higher real rates to slow it down and put some downward pressure on inflation.”
Market pricing suggested the possibility that the US central bank might look to implement even bigger hikes than the 50-basis-point moves it’s done already this cycle.
Traders see 175 basis points of tightening by the Fed’s September decision, implying two half-point and one 75 basis-point hike, according to interest rate swaps tied to FOMC policy outcome dates.
All eyes will be on this week’s Fed statement and Chair Jerome Powell’s post-meeting press conference, where policy makers’ characterization of inflation and long-term forecasts for the fed funds target — the so-called dot plot — will be critical.
The Fed hasn’t hiked by three quarters of a percent since 1994, and tightening of this magnitude is fueling concerns of reduced consumer spending and business activity.
“The high inflation print has put a dent to the peak inflation — and peak Fed hawkishness narrative,” Mohit Kumar, an interest rate strategist at Jefferies International Ltd, wrote in a note to clients on Monday.
“From a Fed perspective, the question is whether they will need to respond even more forcefully with a 75bp at the June meeting.”
Benchmark inflation-adjusted Treasury yields also surged on Monday amid prospects of an even more aggressive Fed. The yield on so-called 10-year Treasury Inflation-Protected Security rose to as high as about 0.53 percent — the highest since March 2020.
Pushing upward real rates, a crucial barometer of true interest costs for corporations, is a key objective of the Fed as it seeks to tightening financial conditions to bring inflation down, Morgan Stanley’s Hornbach said.
The moves reverberated across global assets. Italy’s 10-year yield climbed above 4% for the first time since 2014, widening its spread over equivalent German peers — a key gauge of risk in the region — to 240 basis points.
“The combination of collapsing consumer sentiment, unexpectedly intense price pressures and expectations of Fed activism are conspiring to create a particularly toxic cocktail for risky assets,” said Rabobank strategists including Richard McGuire.
The yield curve inversion “resonates with the notion that the need to tackle elevated price pressures will see the Fed tip the economy into recession.”
That view is consistent with expectations that the Fed will need to loosen policy again within two years. The market is already positioning for policy makers to respond to the looming slowdown with future rate cuts, pricing two quarter-points of easing by the middle of 2024.
‘Dollar Ate My Profit’ Is Corporate America’s Lament Once Again
* FX Impact Cited By 218 S&P 500 Firms In Latest Earnings Calls
* HPE, Biogen Among Those Blaming Dollar For Profit, Sales Hits
Among the cavalcade of challenges facing corporate America, from historically high inflation to the lingering effects of the pandemic, a familiar lament is beginning to dominate C-suite conversations once again: the meteoric ascent of the dollar.
Microsoft Corp. became the latest US firm to make headlines for pointing a finger at the surging greenback, accusing it of eating away at its profits in a rare mid-season earnings forecast revision. It follows similar comments from the likes of Biogen Inc., Costco Wholesale Corp., Hewlett Packard Enterprise Co. and Salesforce Inc., all of which have bemoaned the stronger dollar in recent weeks.
After years of relatively serene global currency markets, foreign-exchange volatility has come roaring back as central banks around the world look to rein in runaway inflation by raising interest rates. With the Federal Reserve leading the charge, the dollar is off to its best start to a year since 2010, extending its gains over the past 12 months to more than 22% versus the yen and 15% against the euro.
For many companies dependent on overseas sales, it’s set to be a gut punch to their bottom lines. That’s because a stronger greenback lessens the value of their foreign revenue when translated back into dollars. It also makes their products less competitive as prices rise in local currency terms, reducing demand.
“There’s concern about the dollar pricing US companies out of the global marketplace, which is very significant when you consider some of our largest cap companies have the greatest bulk of their businesses overseas, or at least sizable amounts,” said Jim Paulsen, chief investment strategist at Leuthold Weeden Capital Management in Minneapolis.
The US currency soared on Monday to the highest since April 2020 on expectations the Fed will be forced to raise rates even more aggressively this year.
Still, earnings revisions based on foreign-exchange fluctuations are often brushed off by investors more concerned with operational performance. In fact some market watchers say currency volatility is too often used as a convenient veil for a poor quarter.
Yet it’s clear that this go around, the stronger dollar is having a tangible impact on corporate results.
About 35% of US firms have enough exposure overseas that a stronger greenback materially hurts their earnings per share, according to Gina Martin Adams, director of equity strategy at Bloomberg Intelligence.
These include many of the country’s largest technology companies, which have complex global operations and can generate more than a third of their sales outside the US.
Salesforce, the leader in cloud-based customer management software, recently doubled its expected revenue hit for the fiscal year to $600 million on account of the stronger dollar, while still predicting growth of about 20%.
“The dollar might have even had a stronger quarter than we did, which is kind of amazing,” co-Chief Executive Officer Marc Benioff said on the company’s May 31 earnings call. “This is great to be a tourist in Japan, but it’s going to have implications as we roll this revenue up from the Japanese market.”
In fact, references to “foreign exchange” are popping up in earnings calls at the fastest clip in three years, according to a Bloomberg analysis. And “hedging” has been mentioned more than in any quarter since 2016.
A representative for Microsoft directed Bloomberg to the company’s June 2 earnings forecast revision, in which the company predicted a $460 million hit to fourth-quarter revenue from currency fluctuations.
A spokesperson for Biogen declined to comment beyond the firm’s May earnings call, in which executives noted that the stronger dollar would result in a revenue hit of about $120 million after hedging.
Costco, which last month said that foreign currency weakness versus the dollar dented third quarter sales by more than 1%, hasn’t made any operational changes despite the increased volatility, Chief Financial Officer Richard Galanti said.
A spokesperson for HPE noted that in addition to currency movements, the company’s downward profit forecast earlier this month was also impacted by Russia’s invasion of Ukraine and Covid-19 related disruptions in China.
The surge has been particularly acute versus the yen and euro, but also versus the British pound and South Korean won, both of which are off more than 12% versus the greenback over the past year.
Every 8% to 10% jump in the dollar triggers, on average, a roughly 1% hit to US company profits, according to Credit Suisse Group AG.
“The strong dollar is an issue for companies because it makes US products less attractive to foreign buyers,” said Jonathan Golub, chief US equity strategist at Credit Suisse Securities. And “when you translate those earnings back to dollars, you get lower numbers.”
On the flip side, a Credit Suisse basket of US companies that stand to benefit from dollar appreciation — those with domestic sales and foreign currency costs — has outperformed a gauge of firms that tend to suffer by about 5.7% this year through mid May.
While the surging greenback’s toll on stock prices has garnered the lion’s share of attention recently, market watchers are starting to warn of impacts on corporate debt as well.
“We view lower-quality credits with high non-US dollar revenue exposure as vulnerable given unfavorable valuation and demand drivers created by the strong US dollar,” Dominique Toublan, head of US credit strategy at Barclays Plc, wrote in a June 3 report.
Barclays advises reducing exposure to BBB rated corporate bonds of firms such as Leidos Holdings Inc., which gets about 87% of its revenue abroad, and automotive supplier BorgWarner Inc.
“Along with inflation, strength in the dollar has been a notable market dynamic that has shown few signs of abatement,” Toublan said.
BTC Price Rejects At $23K As Us Dollar Declines From Fresh 20-Year Highs
The Fed rate hike does not offer much relief as a downtrend in stocks resumes, dragging Bitcoin with it.
Bitcoin (BTC) ran out of steam near $23,000 on June 16 after the biggest United States key rate hike in nearly thirty years.
Dollar Strength Wobbles After Rate Hike News
Data from Cointelegraph Markets Pro and TradingView showed BTC/USD reaching highs of $22,957 on Bitstamp after the Federal Reserve confirmed a 0.75% hike in June — its largest since 1994.
Momentum did not last long, however, and at the time of writing, the pair had shed $2,000 to return to $21,000 at the new Wall Street open.
$BTC Did indeed fail to hold the mid range and fell back to the range low which it has held so far.
This range low is my line in the sand if BTC doesn’t want to revisit the lows and possibly test sub $20K levels.
— Daan Crypto Trades (@DaanCrypto) June 16, 2022
Popular trader Crypto Tony eyed the U.S. dollar on the back of the Fed’s decision, with an about-turn in USD strength key to a possible Bitcoin bottom.
The U.S. dollar index (DXY), after spiking to twenty-year highs again after the announcement, began retracing through June 16.
“Coming up to a big resistance zone on the dollar, which if we can reject from here and dump. The Bitcoin bottom may be in soon,” he told Twitter followers.
“However, I am looking for another tap up before the drop, which coincides with another leg down on $BTC so keep an eye on this.”
Veteran trader Peter Brandt, well known for his Bitcoin bottom calls, meanwhile said that a retest of $20,000 would spark not a genuine recovery but a “relief rally.”
“Basically, the bear market is nowhere close to over for crypto. Was hoping for a nice rally here but the market may need some more time,” commentator Josh Rager added in part of a tweet.
EU, Japan Cracks Show
As U.S. equities opened down after rebounding on the Fed news, concerns around other world economies were just as fresh in the minds of many traders.
The European Union was dealing with a blowout in Italian bonds, while in Japan, currency weakness in the yen was becoming increasingly unnerving.
— Ansel Lindner (@AnselLindner) June 16, 2022
Due to a combination of a strong dollar and ongoing quantitative easing — not tightening — USD/JPY hit its highest since the late 1990s this week.
Both economies’ struggles were covered by Arthur Hayes, former CEO of derivatives platform BitMEX, in blog posts on Bitcoin’s future in recent months.
For Hayes, the macro turmoil, which would ultimately cement Bitcoin’s status, was already playing out but the pain would precede any form of relief for the largest cryptocurrency and its investors.
Investors Seek Safe-Haven Assets Including The Dollar And U.S. Government Bonds
The once-hot crypto market also had a crazy week, reinforcing investors’ concerns that there is nowhere to hide from the current market turmoil. One of the largest crypto lending platforms, Celsius Network LLC, told customers on Sunday it was pausing all withdrawals.
The anxiety spread quickly throughout the sector all week. Companies like Coinbase announced big layoffs and prices for bitcoin and other cryptocurrencies tumbled.
Signs remained that investors sought assets viewed as safe, such as the U.S. dollar and U.S. government bonds. The WSJ Dollar Index, which measures the greenback against a basket of 16 currencies, rose 0.9%. In bond markets, the yield on the benchmark 10-year Treasury ticked down to 3.238%. Yields fall as prices rise.
“We are closer to a bottom,” said Josh Emanuel, chief investment officer of Wilshire Funds Management. He said that equity and bonds markets have already priced in most of the economic and earnings risk. Mr. Emanuel’s firm has reduced exposure to long-duration bonds and favored value equities recently.
The dollar value of bitcoin and other cryptocurrencies showed tepid signs of stabilizing after tumbling sharply over the 10 days prior.
With Markets In Disarray, International Investors Are Stockpiling U.S. Dollars
Foreign investors, concerned about soaring inflation and a global slowdown, are keeping their cash in the U.S. currency.
Typically investors repatriate cash into their local currency, but not this time. U.S. capital flow data show the foreign cash pile of dollars is close to records as investors reduce risky assets in portfolios and hang on to the world’s reserve currency.
“The dollar has assumed the role of the global stagflation hedge with dollar cash being one of the few financial assets offering returns,” wrote Deutsche Bank currency strategist George Saravelos in a note to clients. Stagflation occurs when slow growth combines with rising prices.
The trend is another example of how decades-high inflation, and central banks’ response to it, is upending all manner of markets, including stocks, bonds, cryptocurrencies and commodities. The S&P 500 last week entered a bear market, or a drop of 20% from a recent high, and the dollar is emerging as the world’s haven.
That means that the once-calm currency market is gyrating as well, as the Federal Reserve and other central banks draw down their easy-money policies in an attempt to stop inflation.
The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, is up 3% so far this month. The dollar pared gains last week after the Fed raised interest rates by 0.75 percentage point, but it is still up about 12% over the past year.
The Swiss franc and Japanese yen have traditionally also been havens when financial markets are under distress. But Japan’s central-bank policy—it has so far kept rates around zero—has thwarted the currency’s status as an alternative asset in which to park cash, and the Swiss franc has remained on the sidelines.
While asset managers contend that the dollar is overvalued at current levels, they don’t see many other options. They generally agree that central-bank policy and a flight from risky assets are keeping the world’s reserve currency at multidecade highs even though concerns of a U.S. recession are rising.
“In real terms, with high inflation, you would expect the dollar to depreciate in the long run—that is what the theory says—but the picture is tricky,” said Ugo Lancioni, head of global currency management at Neuberger Berman. Mr. Lancioni expects the dollar to weaken once global growth concerns abate and geopolitical tensions, such as the war between Russia and Ukraine, cool.
The dollar continued to advance against the Japanese yen after the Bank of Japan reiterated Friday that it wanted rates to stay around zero. Gov. Haruhiko Kuroda said raising rates could hurt the Japanese economy, which is dealing with lower inflation than other countries, including the U.S. and the U.K.
The British pound recovered losses against the dollar after the Bank of England on Thursday raised its key interest rate by a quarter percentage point for the fifth consecutive time. Hedge funds and asset managers said they are still selling the pound against the dollar because the central bank isn’t raising rates quickly enough.
They expect that inflation will become more embedded in the U.K. economy, slowing consumer spending. Inflation in the U.K. reached a 40-year high of 9% in April, compared with 8.3% that month in the U.S. The pound is down more than 11% against the dollar over the past year.
Mark Dowding, chief investment officer at one of Europe’s largest fixed income managers, BlueBay Asset Management, is shorting the British pound, a bet that it will fall, because of a coming “stagflationary mess.”
“We think the central bank here [in the U.K.] is getting it all wrong and that will end in tears,” said Mr. Dowding. “The worst is a situation where markets lose faith in the central bank to bring inflation under control.”
Mr. Dowding said he is broadly invested in the U.S. dollar across portfolios.
This week, investors will scrutinize data on the U.S. housing market for clues regarding the effects of higher borrowing costs. Central banks will remain in the spotlight with Fed Chairman Jerome Powell testifying in front of the Senate Banking Committee.
Wall Street analysts are also keeping an eye on oil prices as the next shock that could drive the dollar to fresh highs.
“We think that we will see an oil spike at some point this summer,” said Stephen Gallo, European head of FX strategy for BMO Capital Markets. “With the United States’ near energy-independence status and the dollar still being the primary currency for oil purchases, an oil spike would induce U.S. dollar upside.”
Companies Review Hedging Strategies As Strong Dollar Cuts Profits
Coca-Cola, Microsoft and Salesforce are among the companies that have pointed out the negative effect of the strong dollar on their financial results.
Companies are reviewing their hedging strategies in light of the strong U.S. dollar, which is denting the value of overseas earnings. The strength of the currency also is making some American products less competitive overseas, forcing businesses to look for ways to cut costs as they struggle to maintain margins.
The dollar in recent months has appreciated significantly against other currencies as weaker global economic growth drives investors toward safe havens. Steps by the Federal Reserve to tighten its monetary policy and increase interest rates also support the dollar.
The WSJ Dollar Index, which measures the performance of the U.S. currency against 16 others, is up more than 12% compared with this time last year and is more than 8% higher than at the beginning of the year. That is causing issues for companies in the S&P 500, as many of them generate a chunk of their revenue—on average about 30%—overseas and consolidate it in the U.S.
Some businesses benefit from natural hedges, for example having both revenue and expenses in local currencies, but others don’t, making them more reliant on hedging programs to reduce some of the currency risk and provide them with visibility into what future revenue from abroad will likely look like.
“Higher volatility and interest rates across the globe have raised the cost of hedging currency risk, as well as the risks of not hedging,” said Flavio Figueiredo, global head of Citigroup Inc.’s rates and currencies corporate sales division. “This has pushed companies to take a more active approach to how currency risk is managed in order to more effectively manage the impacts on results.”
Companies in the S&P 500 reported a total of $7.42 billion more in foreign-exchange effects in the first quarter of the year compared with the prior-year period, and a combined $12.57 billion less in gains from hedges and derivatives, according to FactSet, a data provider. Foreign-exchange analysts expect similar impacts in the second quarter.
Mentions of foreign-exchange effects in earnings calls of S&P 500 companies have gone up in recent weeks, to 220 since the beginning of the year through June 20, up from 183 during the prior-year period, data provider S&P Global Market Intelligence found. Similar patterns occur for keywords such as hedging and currency headwinds, S&P said.
“The strength of the U.S. dollar depresses the value of overseas earnings,” said Anthony Carfang, managing director of Carfang Group LLC, a provider of treasury services. “Companies have to grow their overseas revenues just to be even,” with 2021, he said.
Coca-Cola Co. , Microsoft Corp. and Salesforce Inc. are among the companies that in recent weeks pointed out the negative effect of the strong dollar on their financial results.
Microsoft earlier this month cut its earnings and revenue guidance for the quarter ending June 30, pointing to unfavorable foreign-exchange rate movements. Salesforce, a San Francisco-based software company, expects a foreign-exchange headwind of around $600 million for the fiscal year ending in January, which is up $300 million from an earlier forecast.
Medtronic PLC, a medical-technology company, said foreign-exchange rates have become larger headwinds for its business, forecasting a negative impact on full-year revenue of $1 billion to $1.1 billion if recent rates hold.
“Inflation and FX pressures create near-term challenges on our margins, although we continue to look for opportunities to offset them,” Medtronic Chief Financial Officer Karen Parkhill said last month. Medtronic declined to comment further.
Companies now have more tools at their disposal to hedge foreign-currency risks, advisers said, with automated technology allowing for better, more timely insights into exposure. Businesses are also looking at when and how they are converting revenue from overseas and trying to match local income with local spending to create buffers.
“We have seen an increase in interest in hedging, and we are also seeing companies that have never hedged before revisiting this,” said Eric Huttman, the chief executive of MillTechFX, a foreign-exchange marketplace.
Ciena Corp. , a Hanover, Md.-based provider of network and communication infrastructure, hedges some of its exposure to the Canadian and Australian dollars, the Indian rupee, the euro and the Brazilian real, finance chief James Moylan said.
“What happens is once we bill our customers in other currencies than the U.S. dollar, we will hedge,” Mr. Moylan said. The company generates about 25% of its revenue outside the U.S.
Beverage maker Coca-Cola saw a roughly $200 million negative impact on its first-quarter operating income, which came in at $3.4 billion, up 25% compared with the prior-year period. The company has about $7.6 billion in notional foreign-exchange cash-flow hedges in place.
“Based on current rates and our hedge positions, we are reiterating our currency outlook of a two- to three-point currency headwinds to comparable net revenues and a three- to four-point currency headwinds to comparable EPS for FY2022,” CFO John Murphy said during the company’s most recent earnings presentation in April.
There are a variety of tools that treasurers and other executives can use, ranging from forward contracts, which lock in the exchange rate for a purchase or sale of a currency on a future date; derivatives that give the right but not the obligation to exchange at a prearranged rate at a specified date, also called options; as well as instruments like knock-ins and knock-outs, which allow companies to seek the protection of a hedge only at certain exchange rates.
“A knock-out transaction can be a hedge that goes away once the exchange rate rises to a certain level,” said Amol Dhargalkar, a managing partner at financial services firm Chatham Financial.
Some companies are also looking at operational changes, for example changing the terms of contracts when negotiating with foreign suppliers or customers, said Andy Gage, vice president for FX advisory services at Kyriba, a provider of treasury software.
Executives could convert excess cash that is held by overseas subsidiaries into dollars to increase visibility, or use tools such as intercompany loans to offset some of the effects of currency fluctuations, Mr. Gage said.
Pure Storage Inc., a Mountain View, Calif.-based data-solutions company, generates about 25% to 30% of revenue outside the U.S. The business, which reported $620.4 million in revenue during the quarter ended May 8—up 50% from the prior year—is seeing some pressure from the strong dollar, finance chief Kevan Krysler said, even though some of its overseas orders are being paid in dollars.
“We are monitoring this closely,” Mr. Krysler said, adding that the company wants to expand its international business.
The Dollar’s Exchange Rate Is Hurting Emerging-Markets Currencies
Strong U.S. dollar is starting to weigh on South African rand and Brazilian real.
A strong U.S. dollar is now whacking emerging-markets currencies.
Money managers are selling the South African rand and Brazilian real, reversing a trend earlier in the year when the sharpest commodities rally in modern trading history supported emerging-markets currencies despite a strong dollar.
The rand and the real both declined more than 9% against the dollar over the last three months. At the start of April the rand was up more than 8% year to date and the real was up more than 17%.
That is because investors are now focusing on potential global stagflation, a phenomenon where economic growth slows while consumer prices rise. Commodity prices have also eased, with oil, soybeans and copper coming off recent highs.
“The narrative has shifted since the end of May,” said Steve Englander, head of North America macro strategy at Standard Chartered PLC. “The story of muddling through on growth and strong commodities demand has shifted to increasing fears of a slump.”
Worries about runaway inflation and a potential recession have whipsawed financial markets throughout June. Investors are questioning whether the Federal Reserve can raise interest rates just enough to slow down inflation but without throwing the economy into a recession. This month, the Fed upped interest rates by 0.75 percentage point, its biggest increase since 1994.
One result is that the dollar has surged to multidecade highs this year, pushed higher by investors searching for protection against disappointing stocks and bonds. Short-term interest rates have also increased abruptly, tightening financial conditions for corporations that borrow to fund operations.
All that has spurred investors to unload assets that tend to perform poorly during periods of lower growth. Asset managers typically consider emergingmarkets assets as higher risk than developed market bonds such as German bunds and U.S. Treasurys.
The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, is up nearly 2.5% so far this month and nearly 12% over the past year.
“The strength of the dollar recently reflects a worsening external environment and tighter financial conditions,” said Nafez Zouk, an emerging markets sovereign debt analyst at Aviva Investors.
The U.S. dollar functions as the world’s reserve currency and is used for trading commodities in the global economy. A stronger dollar often hurts emerging-markets economies by weakening their currencies and spurring inflation in those countries.
It makes importing foreign goods more expensive, offsetting the benefits of cheaper exports. It was an anomaly when the dollar strengthened earlier this year and emerging markets currencies continued to rise.
Central banks in emerging markets economies have been raising interest rates to combat inflation and keep pace with the Fed. This typically supports currencies because investors favor countries where the central banks show a willingness to fight inflation and pay higher interest rates on debt.
This time, though, investors are wary that sharply higher borrowing costs could spark a recession in those countries. The Bank of Mexico raised interest rates to 7.75% Thursday in a ninth consecutive increase.
The Brazilian central bank’s monetary policy committee, known as the Copom, lifted its key rate from a record low 2% early last year to its current 13.25%, the highest since 2017.
The Brazilian real, once a favorite among asset managers because of Brazil’s status as a leading commodities exporter, has been pushed aside as elections loom and inflation continues to rise. Wall Street traders said the currency usually experiences swings leading up to elections that investors are seeking to avoid.
The Chilean peso, which benefited earlier in the year because Chile is one of the largest copper producers in the world, reached all-time lows against the dollar. The sharp move lower has forced some investors who were holding pesos to sell the currency to mitigate losses, according to traders at Wall Street banks.
Traders said investors are beginning to buy the Mexican peso again after the currency lost more than 5% over the past month.
Analysts say currencies backed by economies with high value commodity exports, such as copper and oil, can cushion the effects of high prices for the food and energy they have to import.
They expect these currencies, such as the Chilean peso, will eventually outperform other emerging-markets currencies. Investors gauge the value of emerging markets exchange rates by scrutinizing trade balances and deficits. Rising import costs frequently increase a trade deficit, or reduce a trade surplus.
“Concerns about food security and inflation are likely to remain elevated,” wrote Barclays strategists in a note to clients. “Markets will continue to differentiate between exporters and importers.”
Stephen Gallo, European head of foreign-exchange strategy for BMO Capital Markets, said the offshore Chinese renminbi is likely to remain weaker against the dollar as concerns rise about wheat shortages caused by droughts and tight global supply.
Mr. Gallo estimates the dollar will keep increasing against a basket of currencies before peaking in September and eventually drifting lower.
“We admit to being unusually uncertain on that view,” Mr. Gallo said. “It is certainly possible that the dollar spike extends to the point that global authorities find themselves scrambling to dust off the Plaza Accord playbook by year’s end.”
The 1985 Plaza Accord was a landmark agreement when a group of major countries agreed to deliberately weaken the dollar to reduce global imbalances by forcing the yen and Germany’s deutsche mark to appreciate.
Gold Ends Lower As Strength In The U.S. Dollar Helps Pull Prices To A More Than 2-Week Low
Silver futures mark lowest settlement since July 2020.
Gold futures ended lower on Wednesday, with strength in the U.S. dollar contributing to a fall in prices for the precious metal to their lowest in more than two weeks.
Silver, meanwhile, also declined, with prices marking their lowest finish in almost a year.
* Gold for August GC00, -0.53% GCQ22, -0.53% delivery fell $3.70, or 0.2%, to settle at $1,817.50 per ounce. That was the lowest most-active contract finish since June 14, FactSet data show.
* Silver futures SIU22, -0.68% for September delivery lost 13 cents, or 0.6%, to end at $20.738 per ounce, the lowest settlement since July 2020.
* Platinum futures PLV22, -2.59% for October delivery rose $4.30, or 0.5%, to $909.90 per ounce.
* Palladium futures PAU22, -0.17% for September delivery rose $84.70, or nearly 4.6%, to $1,946.60 per ounce.
* Copper futures for September HGU22, -2.60% delivery settled nearly unchanged at $3.7805 per pound.
What Analysts Are Saying
“With a fresh higher high move for the dollar, a fresh lower low…in August gold is not surprising,” analysts at Zaner wrote in Wednesday’s newsletter.
The dollar is likely “garnering interest from economic confidence derived from a pair of U.S. Federal Reserve speeches overnight discounting the prospect of a recession,” they said. However, Fed dialogue remains “squarely on track to continue hiking [interest] rates.”
During a panel discussion at a European Central Bank policy conference Wednesday, Fed Chairman Jerome Powell said the Fed “will not allow a transition from a low inflation environment into a high inflation environment.”
In short, “economic uncertainty has been tamped down, interest rates are expected to continue to rise, and the dollar seemingly refocused on attractive yields, instead of flight to quality,” the Zaner analysts said.
So, “gold and silver are presented with several bearish fundamental factors and have forged breakdowns on the charts.”
On Wednesday, a final reading on first-quarter gross domestic product showed the U.S. economy contracted at a slightly faster clip than previously believed. the final reading showed the U.S. economy shrunk by 1.6%, compared with the 1.5% contraction reflected in the first revision.
That fed fears over a recession, which can provide haven-demand for gold, some analysts have said.
In Europe, the headline reading on German inflation declined in June for the first time since January, but inflation data out of Spain showed price pressures accelerating at their fastest pace in decades.
According to preliminary data released by German statistics office Destatis on Wednesday, consumer prices rose 7.6% year-over-year, lower than the 8% forecast by economists in a Wall Street Journal poll. In Spain, the annualized inflation rate in June topped 10%, the highest since 1985.
“Wall Street will likely lean towards anticipating more rate hikes from the ECB, that will drive a weaker dollar, and weakening growth outlooks which should prompt the safe-haven buying of gold,” said Edward Moya, the senior market analyst at OANDA, in a market update.
For now, “gold is still stuck in a wide trading range, but a collapse below the $1,800 seems less likely as the dollar peak might be in place,” he said.
The ICE U.S. Dollar Index DXY, 0.91%, a measure of the dollar’s strength against a basket of rivals, edged up by 0.5% at 105.03.
Meanwhile, palladium was a standout on Comex, up nearly 5%.
While the platinum group metals (PGM) markets are not overly sensitive the prospect of minimal PGM supply disruptions in South Africa, “attacks on power plants (from protests) are expected to cause ‘record’ outages and that’s likely providing palladium with some of its gains over the prior four trading sessions,” analysts at Zaner said.
Bitcoin’s Inverse Correlation With US Dollar Hits 17-Month Highs — What’s Next For BTC?
Market pundits anticipate the dollar rally to either stall or correct by the end of 2022, benefiting Bitcoin.
Bitcoin (BTC) has been moving in the opposite direction of the United States dollar since the beginning of 2022 — and now that inverse relationship is more extreme than ever.
Bitcoin And The Dollar Go In Opposite Ways
Notably, the weekly correlation coefficient between BTC and USD dropped to 0.77 below zero in the week ending July 3, its lowest in seventeen months.
Meanwhile, Bitcoin’s correlation with the tech-heavy Nasdaq Composite reached 0.78 above zero in the same weekly session, data from TradingView shows.
That is primarily because of these markets’ year-to-date performances amid the fears of recession, led by the Federal Reserve’s benchmark rate hikes to curb rising inflation. Bitcoin, for example, has lost over 60% in 2022, while Nasdaq’s returns in the same period stand around minus 29.72%.
On the other hand, USD has excelled, with its U.S. dollar index (DXY) — a metric that measures its strength against a basket of top foreign currencies — hovering around its January 2003 highs of 105.78.
Will Dollar Rise Further?
The Fed appears compelled to increase benchmark rates based on how traders have priced the front-end derivative contracts.
Notably, traders anticipate the Fed to raise the rates by 75 basis points (bps) in July. They also bet Fed won’t raise rates beyond 3.3% by this year’s end from the current 1.25%-1.5% range.
However, a push to 3.4% by the first quarter of 2023 could have the central bank dial back its aggressive tightening.
That could result in a 50 basis point cut by the end of next year, as shown in the chart below.
An early rate cut could happen if the inflation data cools down, thus limiting investors’ appetite for the dollar, according to Wall Street analysts surveyed by JPMorgan. Notably, around 40% see the dollar ending 2022 at its current price levels — around 105.
Meanwhile, another 36% bet that the greenback would correct ahead of the year’s close.
“Foreign exchange is not a linear world. At some point, things flip,” noted Ugo Lancioni, head of global currency at Neuberger Berman, adding:
“I personally have a bias to short the dollar at some point.”
Bitcoin To Bottom Out In 2022?
In addition, the dollar’s ability to continue its rally for the rest of 2022 could be hampered by a classic technical pattern.
First spotted by independent market analyst Agres, the DXY’s double top pattern is partially confirmed due to its two consecutive highs and a common support level of 103.81.
As a rule of technical analysis, the double top pattern could resolve when the price breaks below the support and falls by as much as the structure’s maximum height, as shown in the chart below.
As a result, DXY’s double top profit target comes to be near 101.8, down over 3.25% from the price of July 3.
“The dollar is extremely overbought and overheated,” explained Agres, adding that its correction in the coming sessions could benefit stocks and cryptocurrencies:
“Finally, looking like it [DXY] will topple down hard. In perfect confluence for a melt-up scenario. When [the] dollar goes down, stocks and crypto rally.”
Meanwhile, Bitcoin’s “MVRV-Z Score” has also fallen into a range that has historically preceded sharp, long-term upside retracement. This on-chain indicator predicts that Bitcoin could bottom at around $15,600 in 2022.
Strong Dollar Sends Euro To Lowest In More Than Decade
Soaring energy prices dim economic prospects in Europe and elsewhere, prompting flight to the U.S. currency.
A flight to the U.S. dollar pushed currencies around the world to their lowest levels in years, as economic prospects in Europe and elsewhere darkened under the cloud of soaring energy prices.
The euro neared a 20-year low against the dollar after natural-gas and electricity prices surged on the continent. Currency traders fear Europe’s economy might buckle if Russia completely shuts off natural-gas supplies that are used for heating homes, keeping lights on and running factories. Energy prices were further boosted by labor strikes at Western Europe’s largest gas fields in Norway.
The bloc’s common currency fell as much as 1.5% against the U.S. dollar to trade at $1.0265, its lowest level since late December 2002, according to FactSet. Its decline—as well as the dollar’s strength—this year has renewed the view that the euro could reach parity with the greenback.
The dollar also rose against the Swiss franc and Japanese yen, two stalwart currencies that normally attract investors at times of uncertainty. The yen slipped to nearly 136 to the dollar, close to its weakest since 1998.
In a sign of the broadness of the dollar’s rally, the ICE U.S. Dollar Index, which measures the dollar against a basket of currencies, hit its strongest level in nearly two decades, bringing its year-to-date gain to nearly 11%. The move in the dollar index, if sustained through the end of the year, would be its biggest since 2014, according to FactSet.
Undergirding the dollar’s strength is a Federal Reserve that is seen by markets as more determined than other central banks to raise interest rates to snuff out inflation.
Economists also point to the U.S. economy, which has better long-term growth prospects than most other nations and has more cushion in the form of strong employment and high savings to withstand a global downturn.
Foreign-exchange trading is normally a sedate business, with currencies edging higher and lower by small increments each day. But the war in Ukraine, soaring inflation and central banks tightening at vastly different speeds have jumbled the picture.
A strengthening dollar can have an impact on U.S. investors, making overseas earnings of U.S. companies less valuable. It also makes it harder for overseas companies that borrow in dollars, but generate income in local currencies, to pay back debts.
Big moves in currencies also undermine business confidence, making it difficult for managers to forecast costs and demand.
The strong dollar also tends to weigh on commodity prices, which are denominated in dollars and become more expensive for much of the world, eating into demand. Oil, copper and agricultural commodities all slid as the dollar jumped.
Old relationships between currencies that have dominated trading for years have proved less persistent. Australia’s central bank raised interest rates Tuesday by half a percentage point, a move that should attract savers into the local currency.
Yet the Australian dollar fell to its lowest level since the early days of the pandemic, equal to 68 U.S. cents.
Commodity-producing countries whose economies benefit from higher oil prices, such as Norway and Canada, have edged lower against the dollar. The Canadian dollar fell 1.3% to 77 U.S. cents.
Bitcoin Faces Fresh Pressure As US Dollar Crushes Gold, Risk Assets
BTC/USD falls $1,000 while spot gold gives up 2% as USD strength intensifies, beating the year’s previous peaks.
Bitcoin (BTC) hit daily lows on the July 5 Wall Street open as the U.S. dollar saw a violent surge higher.
USD Sets Yet Another 20-Year Record
Data from Cointelegraph Markets Pro and TradingView showed BTC/USD retreating to $19,281 on Bitstamp as the Independence Day long weekend concluded with a bump.
The pair had seen last-minute gains the day prior, these fizzling as the return of Wall Street trading was accompanied by USD strength laying waste to gains across risk assets and safe havens.
Bitcoin traded down $1,000 on the day, while spot gold shed over 2% and U.S. equities markets also fell. The S&P 500 was down 2.2% at the time of writing, while the Nasdaq Composite Index lost 1.7%.
The U.S. dollar index (DXY), on the contrary, hit 106.59, a level not seen since December 2002 and above previous breakouts from Q2 this year.
Bitcoin analysts thus waited for signs of a trend reversal to provide some relief to crypto markets.
— Trader_J (@Trader_Jibon) July 5, 2022
“Euro hitting record levels, $1.033 at this point. Last seen in the years 2002–2003 and DXY, of course, shooting up like a rocket,” Cointelegraph contributor Michaël van de Poppe commented, noting that the euro was heading towards USD parity.
In additional commentary, Caleb Franzen, senior market analyst at Cubic Analytics, pointed to how the DXY shed light on investor sentiment over the health of the economy.
“Over the past week, yields are falling but the dollar keeps rising. This dynamic proves that investors are rushing to safety, with heightened fears of recession,” part of a tweet read.
Crypto Fear & Greed Index Hits 2-Month High
While volatility edged back into crypto markets, sentiment was yet to reflect the impact of a rampant dollar.
The Crypto Fear & Greed Index stood at 19/100 on the day, still indicative of “extreme fear” but nonetheless its highest reading since before the Terra LUNA debacle in May.
As Cointelegraph additionally reported, investment manager ARK Invest revealed that it was still “neutral to positive” on BTC under current circumstances.
Analyzing Bitcoin futures market sentiment, meanwhile, Edris, a contributor to on-chain analytics platform CryptoQuant, voiced caution about making conclusions over any form of recovery.
The taker buy/ sell ratio, which indicates whether buyers or sellers are in control, saw some relief on the day, Edris showed, but the move should be taken with a pinch of salt.
“However, note that it could just be a consolidation or a bullish pullback before another continuation lower,” a blog post read.
“So, many other factors should be considered closely in the coming weeks in order to determine if a bullish reversal or another bull trap could be expected.”
Bitcoin Price Approaches Potential Springboard To $23K As DXY Cools Surge
With support and resistance inches from its spot price, BTC/USD has increasingly little room to consolidate.
Bitcoin (BTC) approached the July 6 Wall Street open near $20,000 as a fresh battle between support and resistance loomed.
Whale Levels Close By
Data from Cointelegraph Markets Pro and TradingView showed BTC/USD wedged in a tight trading range with liquidity creeping closer to spot on the day.
After recovering 6% losses from the day before, order book data confirmed that support and resistance were now almost shoulder-to-shoulder.
According to on-chain monitoring resource Whalemap, a cluster of whale positions between $20,546 and $21,327 meant that this large area was now the zone to beat.
Buyer interest, meanwhile, stayed at around $19,200. This also formed whale bids after BTC/USD dipped to multi-year lows of $17,600 in Q2.
“D1 Close Above 20.5K And Maybe We’ll Finally Get D1 Trend Retest,” Popular Trader Pierre, Meanwhile, Tweeted In A Fresh Update:
“Warned few weeks ago this was setting up like May for a lot of chop while D1 trend would catch down with price. So far that’s exactly what we got, I’d just like a proper D1 trend retest, last one was at 32k…”
An accompanying chart showed moving averages between 10 days and 30 days keeping spot in check.
At $20,200 at the time of writing, BTC/USD thus traded immediately below an important line in the sand on lower timeframes. For Cointelegraph contributor Michaël van de Poppe, breaking through this could open up the path to the other side of resistance at $23,000.
This one did crack the resistance and ran towards the next area of resistance at $20.3K.
I’m expecting #Bitcoin to consolidate for a bit here, but breaking the next resistance zone is a trigger for continuation towards $23K and a summer relief rally. https://t.co/e8tFtrnEsz pic.twitter.com/DnQHcCL3dF
— Michaël van de Poppe (@CryptoMichNL) July 5, 2022
Industry news had little impact on BTC price action, this coming in the form of crypto exchange Voyager Digital filing for bankruptcy, the latest domino in a chain reaction sparked by the breakdown of lending platform Celsius.
USD Takes A Breather
On the macro level, Asian markets drifted lower, with Hong Kong’s Hang Seng down 1.2% and the Shanghai Composite Index down 1.4% at the time of writing.
The United States dollar index (DXY), fresh from a surge to new twenty-year highs, meanwhile, consolidated immediately below the peak, still above 106.
“First time we’re seeing such a recovery after a severe correction + strength on the $DXY,” Van de Poppe added:
“Strength on the equities as well. Wouldn’t be surprised if this continues in the coming period, despite the overall sentiment being ultra bearish.”
Euro’s Fall Toward $1 Parity: What It Means For Crypto
The 1-to-1 exchange rate may add bearish pressures around bitcoin and inject volatility into euro-pegged stablecoins.
The euro’s fall toward $1 for the first time in 20 years – approaching so-called parity with the U.S. dollar – is turning some crypto traders’ focus to the exchange rate’s impact on crypto valuations and to stablecoins linked to the European common currency.
Thanks to the emergence in recent years of stablecoins tied to government-issued currencies besides U.S. dollars, the vast realm foreign exchange has been slowly creeping into digital-asset markets.
And some observers say the euro’s latest slide could inject bearish pressures into the bitcoin (BTC) market and influence demand for euro-pegged stablecoins.
“Currency turmoil (such as that currently experienced by the euro and others) usually ends up favoring the U.S. dollar, as forex market participants see it as the ‘least risky’ currency. This is accentuated by the divergent interest rate paths between the U.S. and the EU,” said Noelle Acheson, head of market insights at the crypto trading firm Genesis Global Trading.
“This could negatively impact the price of bitcoin in dollar terms, which for the past couple of years has been negatively correlated with the dollar index.” (Genesis is owned by Digital Currency Group, CoinDesk’s parent company.)
The euro has depreciated by 10% against the dollar this year, a significant move for major fiat currency pair. The exchange rate was last seen trading near 1.02, or 200 pips short of the parity level of 1.00.
The decline seems to have stemmed from the European Central Bank (ECB) lagging behind the Federal Reserve (Fed) in tightening monetary policy despite rising inflation, the threat of a full-blown energy crisis in the European Union and recession fears.
“There are evident risks of a recession nowadays and the curtailment of excess dollar margin funding from the securities markets,” Gregory Klumov, CEO of stablecoin platform Stasis, said in an email.
Stasis is the issuer of euro stasis (EURS), which is the world’s second-largest euro-pegged stablecoin as per market value.
“When this happens, all borrowers buy back dollars to pay back the loans they took out to improve returns and increase their exposure to risky assets,” Klumov said. “Therefore, when assets are sold and funding is returned, the dollar grows. The euro is no exception in this case.”
The currency market pundits are convinced that the ECB will continue to lag, allowing EUR/USD to slip well below 1.00.
Engineering a lift-off from a record negative interest rate of -0.5% is easier said than done for the ECB as hawkish expectations recently saw Italian bond yields collapse relative to their German counterparts, raising fragmentation risks.
Fragmentation essentially means as the central bank raises rates, the impact of the tightening is not felt in the same way across the common currency area.
Financial markets are driven by sentiment, so when a major national currency like the euro is trampled and pushed toward or below critical levels, investors tend to move out of risky assets, fiat currencies and seek refuge in established safe havens like the U.S. dollar and government bonds.
Therefore, EUR/USD’s drop to or below 1.00 could spur broad-based demand for the greenback, pushing lower bitcoin and other risky assets.
While bitcoin believers have long hailed the cryptocurrency as a haven asset, historically the digital currency has moved in tandem with technology stocks and in the opposite direction to the dollar index (DXY).
For instance, the DXY, which tracks the greenback’s value against major currencies, has rallied nearly 12% this year. Meanwhile, bitcoin and Wall Street’s tech-heavy Nasdaq index have tanked 55% and 27%, respectively.
Not that things couldn’t change. But that’s mostly been the pattern.
Focus On Euro-Pegged Stablecoins
Euro-pegged stablecoins could lose their shine.
Stablecoins are tokens tracked by a blockchain and intended to consistently match the purchasing power of a fiat currency, like the dollar or the euro. The issuer of the stablecoin promises that users or holders of the stablecoin can redeem the investment anytime at a one-to-one exchange rate.
The structure exposes the user to exchange-rate risk. For instance, assume a trader named Bob purchased one euro-backed tether stablecoin EURT a month ago. Theoretically Bob can redeem EURT for one EUR anytime.
However, EUR/USD has declined by 4.2% from 1.065 to 1.02 in four weeks. So, if Bob redeems EURT today, the redemption would yield a loss of 4.2% in dollar terms, assuming he didn’t earn additional yield by lending out the asset on the decentralized lending and borrowing protocols.
Therefore, holders of euro-pegged stablecoins may opt for redemptions, given the bearish outlook for the common currency.
“Overall, 1.0 is an important psychological level,” Dessislava Aubert, senior research analyst at Paris-based Kaiko, told CoinDesk in an email. “If it breaks, it will most likely spur some FX volatility in the short run, spilling into other asset classes, including crypto, and trigger selling of euro-backed assets.”
Laurent Kssis, managing director and head of Europe at crypto exchange-traded fund firm Hashdex, said the euro-pegged stablecoin market may get tested for its robustness and come under pressure.
Investors are already moving out of the euro-denominated and euro-backed assets, according to Stasis’ CEO Gregory Klumov.
“In a situation where an outflow of capital from euro assets, euro shares and euro bonds takes place, it can be observed that the euro stocks are falling more than the American indices over the past few weeks.
And of course, euro stablecoins are falling deeper relative to their dollar counterparts,” Klumov said.
“Since the dollar remains the #1 benchmark for determining prices in the cryptocurrency realm even for European users, the euro stablecoin is perceived as a risky asset (although the EURS is not a risky asset by any chance).
There are outflows from the euro stables happening right now and investors will change everything into dollars in such a situation,” Klumov added.
One question is whether potential redemptions and volatility in the euro-pegged stablecoins would have a Terra-like contagion effect on the broader crypto market. The answer is probably no because the euro-pegged stablecoin market is quite small.
The euro-pegged stablecoin market was worth $440 million at press time. That’s just 0.29% of the dollar-pegged stablecoin market value of $151 billion, according to data tracked by CoinGecko. Cryptocurrencies more broadly have a market capitalization of $950 billion.
The biggest euro-pegged stablecoin at press time was the euro-backed tether, or EURT, with a market value of $210 million. Euro stasis, or EURS, the second-largest euro stablecoin, had a market cap of $126 million.
Terra’s algorithmic stablecoin UST had a market cap of $18 billion before it collapsed in mid-May, dragging the crypto market lower and leading to volatility in the broader stablecoin market.
“Euro-backed stablecoins are still such a small portion of the overall market that any redemptions the current euro weakness might trigger would not materially impact the overall market cap,” Acheson said.
As of writing, EURT traded at a slight discount, just below the 1 euro peg on Bitstamp, having dropped to 0.96 euro on June 20.
The peg broke after UST’s collapse in mid-May. Meanwhile, the euro tether traded at a slight premium on crypto exchange FTX.
Zero-Sum Game And ECB Rate Hikes
The currency market is a zero-sum game. When we say the euro is likely to lose ground against the dollar, it also means the dollar is expected to rise and there is incentive to hold the greenback-pegged assets.
So while the EUR/USD slide may dent the appeal of the EUR-pegged stablecoins, it could spur demand for the dollar-pegged stablecoins. With the Fed raising rates aggressively to tamp inflation, traders already have a solid reason to hold the dollar-pegged stablecoins.
Besides, the ECB is widely expected to exit the negative interest rate policy this year, which may eventually bode well for the euro and assets backed by the common currency. Circle, the issuer of the second-largest dollar-pegged stablecoins USDC, recently launched a new euro-backed stablecoin called EUROC, perhaps in hopes that ECB’s rate hikes would translate into demand for euro-backed assets.
Interest-rate traders expect the ECB to raise the benchmark borrowing costs by 140 basis points (1.4 percentage point) by the end of the year. The central bank’s benchmark interest rate currently stands at -0.5%.
“Rising interest rates will benefit yield products, like stablecoins,” Bill Cannon, head of exchange-traded product portfolio management at Valkyrie, said.
“Similar to traditional foreign-exchange strategy, utility depends on the use of the product, and it is our understanding that opportunities are limited in the euro-denominated stablecoin products at this time. But just like everything else crypto, that could change quickly.”
Why The Euro Has Tumbled Near Parity To The US Dollar
As the US economy went into meltdown during the 2008 global financial crisis, one euro was worth about 1.6 times the US dollar.
Now a combination of Europe’s front-line exposure to Russia’s war in Ukraine and the European Central Bank’s tardiness in raising interest rates have driven it nearer to parity, or a 1:1 ratio with the dollar. It’s the first time it has sunk to that level since 2002, in the early years of the euro’s existence.
1. Why Is The Euro Sinking?
Europe suffers most from the war, which has sparked an energy crisis and could lead to potentially a long and deep recession. That places the ECB in a difficult position — trying to curb inflation and cushion a slowing economy — as it aims to raise borrowing costs for the first time since 2011. At the same time, the US Federal Reserve is raising interest rates much faster than the 19-nation euro area.
That makes yields on US Treasury bonds higher than those on Europe’s debt, driving investors to the dollar and away from the euro. What’s more, the greenback benefits from its status as a haven, meaning that as the war drags on and the fallout gets worse, the euro keeps sliding.
2. Why Is A Weaker Currency Bad?
For years, policy makers have welcomed a weaker currency as a means to stimulate economic growth, since it makes the bloc’s exports more competitive. But now, with inflation in the euro zone at the highest since such records began, its weakness is undesirable as it fans price gains by making imports more expensive. In June, euro-area consumer prices jumped 8.6% from a year earlier.
Some policy makers have highlighted a weaker euro as a risk to the central bank’s goal to return inflation to 2% over the medium term, although the ECB does not target the exchange rate. Still, when measured against other currencies apart from the dollar, the euro looks more resilient.
3. Is The 1:1 Level Important?
Yes. It’s a psychological threshold for the market. The first time the euro fell to parity with the dollar was in December 1999, not even a year after its inception. Just like now, analysts then pointed to a widening in the spread between German and US bond yields and stronger US growth.
It was a dent in the pride of Europeans, who saw the common currency as an important political project and a rival to the dominant dollar.
Today, the euro is considered one of world’s key currencies for transactions and reserves, though hitting parity is still symbolic. For the financial markets, currency traders expect turbulence around the 1:1 level given that billions of euros in options bets are linked to that big line in the sand.
4. Where’s The Floor?
It’s hard to say. Some analysts predicted the common currency could slide to 90 US cents if Russia escalates the crisis by withholding more gas supplies to Europe. Since the start of July, options traders have been laying more bets at around the $0.95 level, with $0.9850 potentially acting as a short-term bottom, according to trade data from the Depository Trust & Clearing Corporation.
Deutsche Bank strategists have calculated that a slide to $0.95-$0.97 would match the all-time extremes seen in exchange rates since the 1971 end of the so-called Bretton Woods system, which linked the value of many currencies to the US dollar. Still, those levels could well be reached if there is a recession, they said.
5. What Could Spark A Turnaround?
The key is narrowing the interest-rate differential with other global bond markets. By the time the Fed had delivered 150 basis points of interest-rate hikes in just three months, the ECB had yet to move, keeping its key rate negative. While Europe’s rate setters have signaled the start of their hiking cycle — including a potential 50-basis-point increase in September — doubts are brewing over how long they can sustain it. Raising rates is harder for the ECB than other central banks.
That’s because the borrowing costs of more indebted euro-area nations risk spiraling out of control if investors begin to question their ability to sustain debt loads. Even the hint that policy makers were planning to tighten policy quicker than some expected in June sent the Italian 10-year yield surging above 4% for the first time since 2014.
Since then, investors have been more or less reassured by promises of a new tool to prevent unwarranted spikes in bond yields. But if that plan disappoints markets, they could begin to doubt how much tightening the ECB stands to deliver.
6. Is This An Existential Crisis For The Euro?
No, although aside from pressure on its value, the common currency has faced challenges as a concept in the past. Since its formation, naysayers have pointed out the difficulties of managing a monetary union of disparate economies. That became apparent most prominently during the euro zone’s 2012 sovereign debt crisis, as investors started to shun the assets of more indebted countries such as Greece, Italy and Spain.
The rise of euroskeptic politicians in Italy and elsewhere has also provoked concern over the resilience of the bloc. A defining moment was in July 2012, when ECB President Mario Draghi pledged to do “whatever it takes” to save the common currency. Still, direct intervention to support the euro in the foreign exchange markets is rare, although central banks did take action in 2000.
How Low Can The Euro Go?
Investors bet historic slide to parity with the dollar won’t mark the end of euro’s woes.
The euro is hurtling toward parity with the U.S. dollar for the first time since its early years of existence. Investors are betting it could get a lot worse for the common currency.
The descent adds to the eurozone’s inflation woes and complicates the European Central Bank’s plans for unwinding its pandemic stimulus. It also carries big implications for U.S. investors and businesses with operations on the continent, as the value of their overseas earnings slides in dollar terms.
The euro earlier Friday traded at $1.0099, putting it within striking distance of parity, or equal value with the dollar. It recovered later to finish the day at $1.0188. A day earlier it settled at $1.0162, its lowest closing level since December 2002.
Europe’s common currency has fallen more than 10% this year as the European economy faces an energy crisis brought on by Russia’s war in Ukraine that threatens to drive the bloc into recession.
Adding to pressure on the currency, the European Central Bank is trailing the U.S. Federal Reserve’s aggressive plans to lift interest rates, which have boosted the dollar against its peers.
Reaching parity won’t trigger any specific consequences for markets or the economy. But one euro being worth less than one U.S. dollar symbolizes the different economic fortunes on both sides of the Atlantic and could force European officials to reassess how aggressively to raise rates.
For much of this year, traders and strategists have been betting on the possibility of parity, even though it remained a ways off. But fears over soaring natural-gas prices pulled the euro below $1.035 this week, a low last seen in 2017, clearing out automated trades set up around that level.
James Athey, investment director at Abrdn, said he thinks the euro will fall to around 97 U.S. cents, and sees even steeper declines as possible in the short term.
“I don’t discount the idea that it could trade below 90” U.S. cents per euro, he said.
Deutsche Bank analysts estimate the euro could fall to between 95 and 99 U.S. cents per euro after breaching parity. Their analysis looked at how the currency pair reacted in the past to factors such as interest-rate increases or previous periods of economic and market stress.
“A break below parity would signal the market pricing in an imminent recession in the eurozone as well as large negative terms of trade effects due to the energy crisis,” said George Saravelos, global head of foreign-exchange research at Deutsche Bank.
The euro’s slide will have ripple effects on global economies, corporate earnings and consumers’ wallets. For Americans traveling abroad this summer, a weak euro means their dollars can go further.
But for U.S. companies, a weak euro can be a headache, making it harder to compete in export markets. Companies in the S&P 500 generate about 14% of their revenue from Europe, FactSet data show.
For the eurozone, the effects are particularly acute. A weaker euro compounds Europe’s inflation pressure by making imports—particularly of key commodities—more expensive. And unlike in the past, the weaker euro isn’t expected to provide much of a boost to the bloc’s manufacturers by making exports more attractive abroad.
“Theoretically it helps the exporter side of the equation, like in Germany, but they’re having supply chain issues and gas supply issues,” said Brad Bechtel, global head of foreign exchange at Jefferies.
Germany this week reported its first trade deficit since 1991. Exports from Europe’s manufacturing powerhouse fell in May despite the euro’s weakness.
A weaker euro can make euro-denominated assets—such as stocks—less attractive. The benchmark Stoxx Europe 600 index has fallen 14% this year, less than the 18% fall in the S&P 500. But in dollar terms, it has fallen further than the U.S. index.
“At the margin it just makes European investments less desirable,” Mr. Athey said. “As a vote of confidence, if there was an international price for an economy, it would be its currency. This does tend to be a flashing warning sign for foreign investors.”
Not all investors and strategists are convinced the euro may plunge below parity. Viraj Patel, a global macro strategist for Vanda Research, said he sees parity as the bottom of the euro’s slide.
“What takes us down to 95 [cents] or levels like that is really a big crisis in Europe,” he said, noting he believes the continent’s energy troubles have already been priced into the euro’s fall.
A slide below parity will be a “problem for the ECB,” he said, and could change the central bank’s timeline for monetary tightening. Still, he said, “I wouldn’t be buying the euro right now.”
Bitcoin Risks New Lows As $20K Looms Amid Dollar Euro Parity
Support is thin on the ground, analysts and traders warn, as ex-BitMEX CEO Arthur Hayes heralds the start of the fiat currency “doom loop” with USD/EUR parity.
Bitcoin (BTC) headed for $20,000 after the July 11 Wall Street open amid fresh warnings to “prepare for new lows.”
$20,300 Eyed As Next Support Zone To Hold
Data from Cointelegraph Markets Pro and TradingView showed BTC/USD failing to recover losses that had immediately followed the weekly close at $20,850.
The pair had nonetheless locked in its best week’s gains since March, these nonetheless apt to unravel as market uncertainty lingered.
For on-chain analytics resource Material Indicators, the level to watch was a trendline acting as support since June.
“BTC fell back below the 21-ay Moving Average after the Sunday close,” it wrote in a summation-like Twitter post alongside a heatmap of buy and sell interest on major exchange Binance.
“FireCharts shows some bid liquidity in close range, but it may not be enough. If price falls below the trend line, prepare for new lows.”
Others predictably focused on the July 13 United States Consumer Price Index (CPI) data release, this tipped to spark downside across risk assets should June’s inflation significantly outpace estimates.
Blockware analyst Joe Burnett additionally highlighted the potential for miners, already facing tight margins, to capitulate more heavily should BTC price action beat its prior lows.
32 days since the start of Bitcoin’s miner capitulation.
If CPI comes in hot, US equities make new lows, and Bitcoin drops sharply below $20k, get ready for the next wave of capitulations. pic.twitter.com/pKfchsILmf
— Joe Burnett ()³ (@IIICapital) July 11, 2022
“Crucial support now around $20.3K. Has to hold and, if the markets does, new highs pos,” Cointelegraph contributor Michaël van de Poppe nonetheless countered.
Hayes Sees Start Of Fiat “Doom Loop”
Macro takes were hardly any more optimistic. For Arthur Hayes, former CEO of derivatives trading platform BitMEX, confirmation was in that at least the U.S. dollar and the euro were beginning a “doom loop” to oblivion thanks to hitting parity.
Central banks would now have no option but to adopt yield curve control (YCC), sparking the disintegration of the currency which could ultimately leave Bitcoin on top as the new global standard — a prediction previously laid out in a blog post in April.
— Arthur Hayes (@CryptoHayes) July 11, 2022
“$1 = 1€. Foreign currencies crashing against the dollar. And US dollar losing purchasing power fast (CPI est. 8.8%),” PlanB, creator of the Stock-to-Flow Bitcoin price models, added.
“When money dies .. again.”
The U.S. dollar index (DXY) continued its unrelenting surge higher on the day as the European gas crisis pressured the euro, hitting nearly 108.2 — a new twenty-year high.
Asian Central Banks Fight An Unwinnable Battle Against The Dollar
Central bankers are choosing their approach to the strong dollar: aggressive measures, carefully calibrated steps or quiet resignation.
Central banks in Asia are probably fighting a losing battle against the meltdown of their currencies, for love of the dollar is strong right now.
Nonetheless the carnage hasn’t been evenly distributed. The Bank of Thailand, ensconced in Southeast Asia’s second-largest economy, is betting that a rebound in tourism will rescue the nation’s flagging currency—down over 8% against the dollar this year—without forcing it to dramatically raise rates.
India, with its big dependence on imported energy, is also in a tight corner but could catch a break if Western economies cool and pull down energy prices with them. Currencies of commodity exporters such as Indonesia and Malaysia have fared slightly better.
The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, has gained 10% so far in 2022. And with the Federal Reserve determined to continue tightening rates in the face of stubborn inflation and rising odds of a global recession, investors are likely to cling to the dollar for a long time. The best most Asian central banks can hope for is orderly depreciation.
India is under particular pressure as a large commodity importer but has also been taking active steps to curb the scale of capital outflows—including some market-friendly changes. Last week, the Reserve Bank of India relaxed debt-market rules for foreign portfolio investors and allowed commercial banks to raise interest rates on nonresidents’ foreign-currency deposits.
India’s foreign-exchange reserves are still ample at $588.31 billion as of July 1, but they have fallen by over $45 billion in the past half year. The Indian rupee is down about 6.6% since the beginning of 2022, according to FactSet, testing a series of record lows in the past few weeks.
Currencies of neighboring emerging economies such as Indonesia, Thailand and Malaysia have also been routed in the past several weeks. The Indonesian rupiah is down 4.4% since the beginning of April, while the Thai baht is down 8% and Malaysia’s ringgit is down 5.5%.
Their foreign-exchange reserves have also taken a hit, with Thailand being the worst affected. Its reserves have fallen by nearly a 10th during the past six months.
Thailand’s central bank has nonetheless been willing to tolerate a big depreciation given the risk that sharp rate rises would pose to a still-weak economy: With most pandemic restrictions now removed for vaccinated travelers, it is pegging its hopes on a strong rebound for its tourist sector. Before the pandemic, around 20% of Thailand’s economy was tied to tourism.
Indonesia’s currency has performed better than its peers mainly because of strong commodity exports. Following a brief export ban in early 2022, the nation’s coal exports have surged—exports of coal and lignite in May were valued at about $5 billion, according to data from CEIC, more than double the same month in 2019.
That has given Indonesia’s central bank a bit more wiggle room: It has vowed to keep an eye on the weakening currency but resisted raising interest rates so far. Goldman Sachs expects Bank Indonesia to kick-start its tightening cycle in August, delivering a cumulative 1.25 percentage points of rate rises this year.
Asian central banks are walking a narrow path between rates, inflation and capital outflows—with a fair amount of improvisation and hope in the policy mix too. Whatever they do, a real respite awaits an end to the Fed tightening cycle. For now at least, the dollar remains unassailable.
‘Very Small Chance’ BTC Price Could Hit $24K, Says Trader As US Dollar Cools
A pause in dollar strength allows Bitcoin price action to stem losses, but the outlook is anything but positive, analysts warn.
Bitcoin (BTC) fought to reclaim $20,000 on the July 12 Wall Street open as the U.S. dollar cooled its surge to new two-decade highs.
Dollar Bull Run Takes Fresh Breather
Data from Cointelegraph Markets Pro and TradingView revealed a tug-of-war between buyers and sellers following seven-day lows for BTC/USD.
The intraday losses had come at the hands of a rampant U.S. Dollar Index (DXY), which hit its highest levels since October 2002 at risk assets’ expense thanks to inverse correlation.
A subsequent pause gave U.S. equities room to breathe, with both the S&P 500 and Nasdaq stemming losses on the day.
Good to note how quickly risk assets tend to move up when $DXY even goes down the slightest amount.
Way more responsive to DXY’s downside than it’s upside.
When DXY does cool down we’re due for some solid bounces I reckon.
— Daan Crypto Trades (@DaanCrypto) July 12, 2022
With the July 13 Consumer Price Index (CPI) print in focus, however, optimism around crypto on shorter timeframes was barely perceptible.
For popular trader and analyst Crypto Ed, there was “more pain to come” for both BTC and stocks.
“There is a very small chance that we see a double correction towards $24,000 or $25,000,” he forecast in a fresh video update, analyzing potential Elliott Wave moves after Bitcoin’s spike to $22,400 last week.
The chances of significant relief were “small,” however, with the option of “nuking down” also on the table.
Bitcoin hodlers face “remarkable pressure”
For on-chain analytics firm Glassnode, meanwhile, there were already signs from the market that Bitcoin could be in the latter part of its bear cycle.
n the latest edition of its weekly newsletter, “The Week On-Chain,” analysts argued that long-term holders — those least likely to capitulate — were under “remarkable pressure” to sell.
There was, however, still room left to drop if Bitcoin was to repeat previous bear market behavior.
“The present market structure has many hallmarks of the later stage of a bear market, where the highest conviction cohorts, the long-term holders and the miners, are under remarkable pressure to surrender,” it concluded.
“The volume of supply at a loss has now reached 44.7%, of which a majority is carried by the Long-Term Holder cohort. However, this remains at a less severe level compared to previous bear cycles.”
Charts supporting the thesis included Long-Term Holder Spent Output Profit Ratio (LTH-SOPR), a metric which tracks average profit or loss of LTH coins being spent. LTH addresses are those holding coins for at least 155 days.
“LTH-SOPR is currently trading at 0.67, indicating the average LTH spending their coins is locking in a 33% loss,” Glassnode noted.
Euro Drops To Dollar Parity For First Time In Two Decades
* Energy Crisis, Recession Risks Weigh On The Common Currency
* Weaker Euro May Stoke Record Inflation In The Euro Area
The euro has suffered a swift and brutal slump this year, and now it’s crossed a major threshold for the first time in more than two decades: parity with the dollar.
The 12% decline is the result of multiple pressures, from the war in Ukraine to an energy crisis and the growing risk that Russia cuts off gas exports and pushes the euro area into recession.
Add in central banks moving at vastly different speeds and an in-demand dollar, and some analysts say parity may not be the end point, but merely a stepping stone to further weakness.
“A break of parity may have been delayed by some market participants attempting to protect a sea of options being triggered below that level, but it is not difficult to put together a case in which the euro could fall further,” said Jane Foley, head of FX strategy at Rabobank in London. “This very much depends on the gas flow from Russia into Germany and whether there will be rationing over the winter.”
The common currency slipped as much as 0.4% Wednesday to touch a low of $0.9998. The final leg lower came after data showed US inflation accelerated by more than forecast, boosting bets on Federal Reserve rate hikes. It bounced back to trade at around $1.006 as of 3:45 p.m. in New York.
The downward spiral hasn’t been accompanied by the type of existential doubts that hung over the euro when it plunged during its infancy in the early part of this century, or when the sovereign debt crisis took hold a decade ago.
However, it’s still a problem for the European Central Bank.
It’s also trouble for consumers in the 12 trillion-euro economy, feeding an inflation spike that’s already out of control, with prices rising at a record pace close to 9%.
The depreciation has been incredibly rapid, given the euro was trading close to $1.15 in February. It’s all the more remarkable given that less than two years ago, ECB policymakers were concerned about excessive euro strength leading to an inflation undershoot. Now they confront a different world: a dramatic plunge in their currency and consumer prices surging.
Some ECB policy makers have already signaled that the weakness is on their minds, particularly when it comes to imported inflation. Earlier Wednesday, Francois Villeroy de Galhau said the central bank is watching the euro’s drop because of its effect on consumer prices.
“The ECB does not target a particular exchange rate,” an ECB spokesperson said on Wednesday. “However, we are always attentive to the impact of the exchange rate on inflation, in line with our mandate for price stability.”
In addition to the dual inflation-recession threat, the ECB is also dealing with the risk of sovereign borrowing costs diverging too much as it reverses course on stimulus. After Italian yields spiked last month, the Frankfurt-based institution began work on a tool to prevent the eruption of another debt crisis in the region.
The euro’s descent this year is just one part of a global story of dollar dominance. The greenback has been in favor this year as a haven investment, helped by higher US interest rates, and there’s been speculation the rally could spur global policymakers to intervene to weaken it at some point.
At a meeting in Tokyo on Tuesday, US Treasury Secretary Janet Yellen and Japan’s Finance Minister Shunichi Suzuki said that volatile exchange rates pose a risk, and pledged to consult and “cooperate as appropriate on currency issues.” The yen has declined to its weakest against the dollar since 1998.
The single currency, meanwhile, has particularly suffered because of Europe’s proximity to the Ukraine war and its reliance on energy imports from Russia.
Monetary policy is also a driving force, given that the ECB has been slow to join the kind of aggressive policy tightening deployed elsewhere. At the same time, increasingly-large Federal Reserve interest-rate hikes have supercharged the dollar, and created a rate differential that will keep the pressure on the common currency.
Nomura International Plc strategist Jordan Rochester is already targeting further pain with a drop to 95 US cents. Citigroup sees it sliding below that level if Russia cuts of gas exports to Europe. The euro “remains effectively unbuyable this summer,” Kit Juckes at Societe Generale SA said earlier this month.
The euro, now the currency for 19 countries and around 340 million people, has had many ups and downs since it began in 1999. A bout of weakness in its early days pushed the currency below 85 cents against the dollar and led to questions about its viability and even dire predictions of its demise.
Eventually the ECB, along with other major central banks from the Group of Seven, staged a surprise intervention to boost the euro in 2000.
Shortly after Russia invaded Ukraine, we predicted the Euro would fall through parity. The war is a body blow to the Euro zone. It undercuts Germany’s economic model, which for decades was built on cheap Russian energy. Without German growth, the Euro zone is in real trouble… pic.twitter.com/xwdwVig5qq
— Robin Brooks (@RobinBrooksIIF) July 8, 2022
The euro’s initial slump gave way to a period of appreciation, with the currency at one point reaching $1.60 in 2008. That strength was seen as damaging to the economy, and euro-area politicians blamed it for hurting companies. Among those voices was France’s finance minister at the time, Christine Lagarde.
The euro weakened again as the global financial crisis took hold in 2008, and then entered a period of volatility as Europe’s sovereign-debt crisis wreaked havoc. Once again, the euro’s future was in doubt amid soaring borrowing costs, bailouts for indebted nations, a recession and record unemployment.
It was at that time that then-ECB President Mario Draghi compared the euro to a bumblebee — a “mystery of nature” that shouldn’t be able to fly, but can.
Once the worst of that episode passed, the ECB continued with stimulus, limiting the currency’s upside. Then, starting in mid-2021, the euro began a steady slide downward toward parity.
While the ECB could hike more aggressively to buoy the euro now — a rationale Governing Council member Robert Holzmann has used to justify a half-point rise — its agency may be limited by the darker economic outlook. In a Bloomberg survey this month, economists put the risk of a euro-area recession at 45%, up from 30% in June.
“No doubt the ECB will be quite concerned by the move, especially if it develops into a ‘sell the eurozone’ mentality,” said ING Groep NV strategists led by Chris Turner. “Yet faced with the looming risk of recession — and the euro being a pro-cyclical currency — the ECB’s hands may be tied in its ability to threaten more aggressive rate hikes in defence of the euro.”
Euro Slips Below Dollar As Europe’s Economic Fortunes Slump
Currency falls as fears of Russian gas cutoff shake the bloc’s economy.
The euro’s slide below parity with the U.S. dollar reflects Europe’s sinking economic fortunes in the face of the war in Ukraine. But unlike the last time the euro was this weak 20 years ago, nobody is coming to the common currency’s rescue.
The euro depreciated by 0.4% against the dollar Thursday. While it closed above parity, one euro recently bought $0.9981, the common currency’s weakest level since 2002.
The euro has been on a steady decline this year, and the selloff intensified in recent days as investors girded for Russia to enact a full-blown gas cutoff that many fear will drive the region into a deep recession. Driving the euro even further lower on Thursday was a brewing political crisis in Italy.
Reaching parity—when two currencies are equal in value—is largely symbolic for investors, and is expected to have a limited impact on financial markets. But a weak euro does affect the region’s economy.
It drives up the cost of imports and fans Europe’s already high inflation rate while making what Europe exports cheaper in international markets.
“What it is indicative of is that this is a horrific situation for the eurozone,” said James Athey, investment director at Abrdn, who thinks the euro could fall to 90 U.S. cents or below in the short term.
The weak euro evokes memories of the euro’s first years of existence in the early 2000s. The newly minted currency traded below parity with the dollar and was gripped by a “confidence crisis,” said Carsten Brzeski, chief eurozone economist at ING.
Back then, global central banks were forced to step in to help stem the slide in the euro, which policy makers feared would hurt the global economy. It took almost three years for the euro to fully find its way back above parity.
It has traded stronger than the dollar ever since, even throughout the early 2010s sovereign-debt crisis that nearly tore the bloc apart.
This time, the euro’s weakness is less about confidence in the euro as a currency than about a set of economic realities, including the bloc’s energy woes, Mr. Brzeski says.
The weak euro is also the flip side of the broad strength of the U.S. dollar, which buys more today compared with other currencies than it has in a generation.
Crucially, U.S. policy makers have signaled they are relaxed about a strong dollar, which helps in the battle against soaring inflation. That makes a coordinated intervention by central banks to support the euro less likely.
Driving the dollar has been an aggressive Federal Reserve, more intent on raising interest rates to fight inflation than other central banks.
Cash tends to gravitate to economies that offer a combination of growth prospects and higher interest rates. Fed Chair Jerome Powell told congressional leaders last month that a strong dollar could help reduce inflation.
The European Central Bank has kept the euro under pressure by moving more slowly to increase interest rates than the Fed.
The euro has lost more than a 10th of its value versus the dollar this year, and briefly dipped just below $1 on Wednesday on some, but not all, foreign-exchange trading platforms.
Unlike stocks, there is no centralized pricing for currency trading. On Thursday, the euro fell below parity according to broker Tullett Prebon, which provides data to The Wall Street Journal.
The ECB is expected to lift its key interest rate by one-quarter of a percentage point next week, to minus 0.25%, marking its first rate increase in more than a decade.
After this week’s soaring inflation report, the Fed, in contrast, is expected to increase its policy rate by as much as an entire percentage point to a range of 2.5% to 2.75% this month.
A weaker euro makes Europe’s exports cheaper while helping to lure overseas tourists to the beaches and resorts of Greece and Spain.
That export-boosting effect is being eaten up by a large increase in the price of the continent’s imports, especially energy and raw materials, many of which are priced in dollars, analysts say. Those price increases are driving up inflation across the currency bloc.
“The extreme price increases in import and producer prices overshadow any profit that exporters can book for themselves due to a weaker currency,” said Sonja Marten, head of foreign exchange and monetary policy research at DZ Bank in Frankfurt.
Cheap Russian energy has been a key crutch of Europe’s industrial power. Now, investors fear that Russia will use maintenance that began Monday on the Baltic gas pipeline Nord Stream as an opportunity to cut off those gas flows to Germany for good.
Despite efforts to reduce its dependence on Russia in the wake of that nation’s invasion of Ukraine, the European Union still relied on Russia for about 20% of its gas supply in June, according to Brussels think tank Bruegel. Russia has cut off supplies to EU member states including Poland, Bulgaria and Finland and reduced flows to Germany.
The weak euro complicates the ECB’s task of controlling inflation.
Some ECB officials have signaled publicly in recent weeks that they would like to see a stronger euro, suggesting that the bank might be ready to increase rates more aggressively.
The ECB’s chief economist, Philip Lane, highlighted the weakness of the euro at the bank’s latest policy meeting in June, and ECB officials kept the door open at that meeting to a larger interest-rate increase this month, according to the minutes, which were published last week.
But the ECB’s pushback has been limited, suggesting that policy makers are relatively relaxed about the euro’s short-term price movements.
For the ECB, “it is not the absolute level of the exchange rate that is decisive, but the dynamics and speed of the movement,” said Ms. Marten. “A premature intervention in a fundamentally driven market could fizzle out and thus endanger the reputation of the ECB.”
Any move to increase rates sharply could threaten to intensify the longstanding imbalances within the bloc that drove the sovereign-debt crisis.
Borrowing costs in Southern Europe surged by much more than those in Germany after the ECB unveiled plans in May for a gradual series of interest-rate increases.
Those yields have fallen in recent weeks after the ECB announced last month that it was developing a new bond-buying tool to prevent “fragmentation” among countries, which it is expected to unveil after its July 21 policy meeting.
Kiran Ganesh, a multiasset strategist at UBS, believes the euro will recover against the dollar as the market focus shifts to the prospect of the Fed cutting rates to cushion a slowing economy. On top of that, the euro’s cheapness will eventually bring buyers back.
“If the dollar gets too strong, then at some point the U.S. starts to lose some appeal as an investment destination because everything gets expensive for overseas investors,” he said. “In the end things do get too cheap in Europe as compared to the U.S.”
The Euro And Dollar Are At Parity, Making Europe Travel A Little Cheaper
For American travelers abroad, a strong greenback can help with dining, souvenirs and other daily expenses.
The strength of the U.S. dollar is making European trips more affordable for American travelers. Just don’t expect a cheap flight overseas.
The euro has slid to parity with the U.S. dollar. The two currencies were last valued the same in 2002.
The currency shift reflects an energy crisis in Europe, among other factors. For Americans traveling abroad, the strong greenback helps in many ways. It won’t make the flight to Europe any cheaper, as those flights are priced in dollars, but it will make euro-priced inter-Europe flights more affordable.
Where Americans will likely see the most bang for their literal buck is in gifts and souvenirs, say travel professionals.
The price tags that Americans see in European stores are now on par with the cost in dollars, and that can represent a significant savings. For instance, a designer purse purchased in Paris or Milan might now cost less than one bought in New York, not accounting for value-added tax.
When paying, make sure to use the local currency. Credit-card terminals will often give the option of paying in dollars or the currency of the country you are in. Your bank or credit-card company will typically offer a better exchange rate, says Brian Tan, founder and chief executive of travel company Zicasso.
Rima Brindamour, a photographer from Brooklyn, N.Y., is in Sicily after eloping in Rome. She said the favorable exchange rate made her feel better about spending money to celebrate on her honeymoon.
“We have been splurging on conveniences we wouldn’t normally splurge on,” Ms. Brindamour said in an email. Treats have included a private airport shuttle, wine tours and poolside lunches, she says.
With interest in travel to Europe soaring, finding a deal to get there remains tough. Here is where the strength of the dollar will and won’t help you.
Flights to Europe are priced in dollars, so the exchange-rate benefits don’t apply. Purchasing tickets through a Europe-based carrier won’t save you much either, since major airlines typically code-share with other carriers, says Hayley Berg, lead economist at travel-booking app Hopper.
When airlines enter into code-sharing agreements, they can market flights operated by other carriers. For instance, a traveler could purchase air travel through American Airlines, but the actual flight might be operated by British Airways.
Booking with a low-cost carrier might offer savings, more because of its relatively lower prices and not the currency rate.
Airfare to Europe this fall is averaging $672 round-trip from the U.S., according to Hopper data, up more than 5% from 2019 levels.
Airfares within Europe are where some of the savings due to the favorable exchange rate could come into play. To get the best deal, pay attention to the point of sale.
“If you are in Europe booking a flight from Paris to Berlin, you may see a different price than if you were in the U.S. looking at that same flight,” Ms. Berg says.
Booking through a larger travel provider, such as an online travel agency, can be useful in these circumstances, Ms. Berg says. The online travel agencies typically maintain points of sale in various parts of the world, allowing them to perform transactions in the cheapest way.
Another option to get the euro price when booking intra-European flights is to toggle to the local website for the airline and book that way.
One way to get to the local site: Visit an airline’s website and switch which country you are in from the main home page (such as a flag icon in the top corner of the site). Or, when typing in the url, you can use the country-specific url, such as Airfrance.fr for Air France.
More travelers are coming to Europe, which means daily rates for hotels are higher than they were a year ago. When comparing countries with more than 50,000 hotel rooms, European nations posted the highest rates amid this summer’s travel surge, according to hospitality-data and analytics company STR.
Hotels “are quite reactive with their pricing,” says James Whiteman, a product manager with travel company Niarra Travel based in London.
In some of Europe’s most popular destinations, such as Rome and Florence, rooms are completely booked, Mr. Tan of Zicasso says. Your dollar will go further in places that are less popular this year, such as Portugal and Croatia, or in smaller towns that might still be recovering from the hit they took during the pandemic.
The dollar’s strength can offset the added cost of splurging on nicer accommodations.
Paul Bachant, founder of New York- and Amsterdam-based travel agency Insider Voyages, says he has clients who have opted to upgrade to a higher room category.
“Let’s say they’re booking a deluxe room, they’ll go for a suite because the prices are more reasonable now,” Mr. Bachant says.
For travelers booking a vacation in the future, paying for a hotel room is now a game of chance. You can pay in full now for the hotel if you think that the dollar’s strength won’t last, Ms. Berg says. Or you can wager that it will only get stronger and wait to pay when you arrive.
Food and souvenirs
Daily expenses such as dining at restaurants and buying gifts are where the dollar-euro parity can have the biggest effects.
Last year, Zicasso’s Mr. Tan dined at a Michelin-rated restaurant in Croatia, and he has noticed that prices on the menu have gone up around 20% since then.
During that time, however, the dollar had gained about 18% against the kuna, Croatia’s currency. Consequently, the price of a meal was only slightly more expensive.
There has been a similar move of roughly 19% in the dollar against the euro in the past year. This means that an American using dollars to buy a euro-priced item in a store will spend 20% fewer dollars to buy the item this year compared with last year—if the item hasn’t changed in price and neither have taxes.
When paying, remember again to make sure to use the local currency with your credit card.
The financial savings aren’t the only appeal. The dollar reaching parity with the euro also removes a lot of the guesswork for American travelers when they’re spending money overseas.
“When you’re not always constantly doing the math, you can enjoy your trip a little bit,” says Donna Quadri-Felitti, the Marvin Ashner endowed director of the School of Hospitality Management at Penn State. “It’ll be an easier trip.”
This Could Be The Start Of A Dollar ‘Doom Loop’ Like No Other
A reverse currency war beckons.
The dollar’s gain is the world’s pain — and based on its current trajectory, the world may be in for a whole lot more discomfort.
Concerns over global growth have recently sent the Bloomberg Dollar Index to the strongest level on record, with the greenback hitting multi-decade highs against currencies like the euro and the yen.
But the move risks becoming a self-reinforcing feedback loop given that the vast majority of cross-border trade is still denominated in dollars, and a stronger US currency has historically translated into a broad hit to the world economy.
Against the backdrop of higher-than-expected inflation and still-elevated commodities prices, the concern is that we’re in for a dollar ‘doom loop’ like never before, according to Jon Turek, the founder of JST Advisors and author of the Cheap Convexity blog.
With the Federal Reserve hiking interest rates at the fastest pace in decades, he says, it’s much less clear what could break the feedback loop in the next few months.
“What makes this version of the doom loop really scary is it’s kind of hard to see how those circuit breakers play out over the near term,” Turek says in a new episode of the Odd Lots podcast.
“We have a European problem, which creates pressure on the euro, which sends the dollar higher, which worsens the manufacturing cycle, which does this whole thing again. But is the Fed going to pivot with spot inflation at an eight handle?”
Of course, there have been periods of notable dollar strength before — such as in 2016 or 2018. Back then, the currency gained as the Fed sought to tighten policy and stopped once the central bank stayed its hand.
With data released last week showing US CPI surging 9.1% year-on-year in June, the Fed has much less wiggle room to reverse course.
So the key question is to what extent the stronger dollar reduces the Fed’s inclination to go even bigger on interest-rate hikes in the coming months — in turn potentially providing some relief to exporters and leveraged borrowers around the world?
“It’s a little hard to see what kind of stops this. And I guess the best answer is that it could stop itself,” Turek says. “Something to start to think about — especially past September FOMC and really into the end of the year — depending on how bad the growth conditions are, especially in Europe, is: Will the Fed sort of be able to do this implicit handoff from interest rates to global economic conditions?”
When it comes to the dollar loop, there are many transmission channels. Researchers such as the International Monetary Fund’s Gita Gopinath and the Bank for International Settlements’ Hyun Song Shin, for instance, have shown that the dollar’s role in global trade means that a stronger US currency can lead to a tightening of global financial conditions and a hit to real investment.
The US currency also has a special position in world markets. When investors are worried, they tend to rush to the safety of dollar-denominated assets, sending the currency even higher.
That’s one reason why the dollar surged when markets crashed in March of 2020, and why it’s been strengthening now.
Complicating the current situation is the fact that major central banks around the world are now in tightening mode, or about to be. The European Central Bank is expected to begin hiking rates this month for the first time since 2011.
Germany, in particular, faces a double economic whammy as soaring natural gas prices also cut into its manufacturing sector.
“We’re in a world now where central banks who are all dealing with above target inflation have very little tolerance for massive currency weakness because it’s thought to only amplify the pressures that they’re dealing with by hiking rates,” Turek says.
“We are in this sort of reverse currency war, but I think that central banks are clearly making an emphasis on the role of currencies, some more explicit than others, of course … Given the nature of the shock, it does make sense for central banks to have a very big, you know, overarching currency focus.”
That may be one reason why Switzerland’s central bank surprised the market with a 50 basis point rate rise in June, its first hike in 15 years. Even though the Swiss franc has been relatively strong, Turek argues, “it hasn’t been strong enough in real terms to kind of offset some of the above target inflation that even they’re seeing.”
Meanwhile, at the Bank of England, Catherine Mann noted in a speech earlier this month that “tighter US monetary policy tends to boost UK inflation because of the weaker pound.”
The wild card could be China, Turek says. Credit in the country jumped in June after the government unleashed stimulus aimed at offsetting the effects of rolling Covid-19 lockdowns.
But even with the stimulus, it’s tough for new loans and other types of monetary easing to transmit to the real economy given ongoing pandemic restrictions.
Recent dollar strength is at odds with predictions made earlier this year that the invasion of Ukraine and subsequent sanctions could mark a turning point for the US dollar.
On the other hand, the timeframe for reducing the dollar’s role as the world’s reserve currency was never expected to be a quick one, and a painfully soaring greenback could ultimately still encourage countries to seek alternatives.
And in the US, the dollar doom loop could end up doing some of the Fed’s work for it when it comes to fighting inflation.
“What makes this version of the doom loop so challenging is that it is a condition or an externality that the Fed, in its efforts to lower inflation and lower inflation quickly, is actually accentuating what I think is almost, in their view, positive,” Turek says.
“The question that market participants should begin to ask is if the dollar is doing all this work, you know, does the Fed have to go to 4.5% or something like that? I think that is an interesting question on its own, but in terms of what arrests this current dynamic, it’s really tricky.”
The US Is Exporting Inflation, And Fed Hikes Will Make It Worse
Pandemic spending on goods and a supercharged dollar boost inflation elsewhere, as the US trade gap—once a boon—becomes a headache.
For decades, US households bailed out the global economy when it needed a consumer of last resort. America’s latest spending spree has come with a sting in the tail.
Stuck at home in the pandemic, people all over the world bought more goods—TV sets, laptops, and exercise bikes, to name a few—at the expense of services such as hotel rooms and gym memberships. The shift was significantly bigger in the US than in other rich countries.
It’s been amplified by such retailers as Target Corp. and Walmart Inc., which piled even more stuff in their inventories than Americans wanted to buy. And since these goods are traded globally—with supplies constrained by Covid-19—US demand pushed up prices in other countries, too.
In effect, the US has been exporting inflation during its pandemic rebound.
That underscores a profound change in the global economy. In the pre-Covid world, goods were abundant and the challenge was finding buyers.
Countries such as Germany and China, which ran big trade surpluses, often got blamed for free-riding on demand generated elsewhere and not chipping in enough of their own. By contrast, America’s trade deficits were seen as a boon for other economies.
In the new age of scarcity, that story has been flipped on its head.
“Everything is the opposite now,” says Jason Furman, an economics professor at Harvard. “There used to be too little demand. Now there’s too little supply.
And in a world of too little supply, the country doing the most to generate demand, which is the US, is exporting its problem—its problem being inflation.”
Now there are signs that American consumers are dialing it back as the Federal Reserve ratchets up interest rates to cool the economy and combat inflation.
For the rest of the world, that may just create a different headache as the US switches to exporting inflation through another channel: the super-strong dollar.
With rates in the US rising much faster than in the euro zone and Japan, the dollar is soaring. Last week it breached parity with the euro for the first time in two decades.
This makes goods imported from the US—and all kinds of commodities that are typically priced in dollars, notably oil—more expensive for other countries.
“US demand will be reduced, but the mechanism by which that will happen will also be responsible for a stronger dollar,” says Furman. “So this won’t necessarily resolve the problem of US-exported inflation for other countries.”
To be sure, consumer demand is just one cause of the worldwide spike in inflation—arguably not the main one even in the US, where Covid stimulus was largest.
In Europe and elsewhere, energy and food costs are driving up inflation as Russia’s invasion of Ukraine exacerbates pandemic-induced breakdowns in supply chains.
Still, at least some of Europe’s inflation is a trans-Atlantic import, says Holger Schmieding, chief economist at Berenberg Bank in London.
“Not directly in the sense that we bought expensive things from the US,” he says. “But in the sense that the US, and their large demand following the stimulus checks, contributed to supply bottlenecks around the world—and to higher prices.”
Since pandemic inflation took off last year, the US has had more of it than Europe. Lately the gap has narrowed, but that doesn’t tell the whole story.
The two economies may have similar rates of inflation, but they have different kinds, with major implications for how central banks can tackle the problem. Much of the distinction boils down to how big a share of price pressures is homegrown.
In the US, hot household demand—chiefly for goods—has played a larger role. “That’s the kind of inflation that doesn’t disappear on its own,” according to Bloomberg Economics’ Ana Luis Andrade.
This is one reason the Fed is expected to lift rates by much more than the European Central Bank will.
But if spending by American consumers is driving US inflation, at least that’s something the Fed can fix.
Monetary policy is a blunt instrument that reins in prices by lowering domestic demand. When inflation comes from outside, as almost all of it does in Europe, there’s a risk that higher ECB rates will just slow the economy without addressing the causes of high prices.
“It makes the job of the central bank much harder” in Europe, says Luca Fornaro of the Barcelona School of Economics, co-author of a recent paper that examined the links among the Covid goods-buying splurge, trade balances, and global inflation.
“It’s very clear that the Fed should hike, which will lead to a slowdown in activity—but starting from a high level, so it shouldn’t hurt that much,” he says.
“In the euro area we have the worst of both worlds”: inflation high enough that it seems to require monetary tightening, and an economy barely strong enough to need cooling off.
ECB Executive Board member Isabel Schnabel has argued that officials still can’t afford to sit on their hands because they need to ensure that inflation expectations don’t get out of control.
As US demand eases, so will the pressure on supply chains, offering Europe some relief.
“Most of our inflation is caused by energy, commodities, and food, but it will help a little,” says Berenberg’s Schmieding. “It may dampen inflation by half a percentage point over the next 12 to 18 months.”
Pushing in the other direction is the soaring dollar. Currencies such as the euro and Japanese yen are at multidecade lows against the dollar. That means cheaper imports—and therefore lower inflation—in the US, and the opposite elsewhere.
Fornaro likens the situation to a “reverse currency war.” Instead of pursuing depreciation to boost exports, as many did before the pandemic, “what each country would like to do is appreciate its currency and run a trade deficit, which helps to contain inflation domestically.”
The US is clearly winning that contest. Asia, which like Europe relies heavily on external energy (China is the world’s biggest buyer of oil), is vulnerable. Chinese officials must pay attention to “preventing imported inflation,” Premier Li Keqiang warned last week.
Asian central banks have been restrained in raising interest rates compared with the Fed. That may amplify the inflationary impact of the dollar’s strength, according to Rob Subbaraman, head of global markets research at Nomura Holdings Inc.
The risk, he says, is that a widening gap in rates “fuels capital flight and sharper currency depreciation against the US dollar, adding even more inflation pressure.”
With A Strong Dollar Against A Weaker Euro, American Tourists Are Spending In Europe
Many travelers are splurging on luxury goods, fine wines and accommodations, while others are already planning to go back later this year
For Americans traveling to Europe, a weaker euro is granting them a license to splurge.
The euro briefly reached parity with the U.S. dollar on Thursday, with the European common currency being worth less than $1 for a brief period last week. Parity occurs when the two currencies are equal in value.
The move marked the euro’s lowest level since 2002, with the currency’s value relative to the dollar down 15% over the past year.
For investors, the milestone caps several months of declines for the euro as the war in Ukraine and other problems affect Europe’s energy supplies and economy. But for Americans traipsing across the continent, the euro’s weakness and the rising dollar are prompting a shopping spree.
Many U.S.-based tourists are spending on luxury goods, fine wines and high-end accommodations. Others say they are planning additional return trips overseas to take advantage of the potential savings.
Traveling to Europe also offers Americans a brief respite from the impact of rising inflation, since the dollar’s strength has helped to offset some of the higher costs in Europe.
Shannon Mains and her husband recently took a monthlong sojourn to Europe, which included traveling by rail on the famed Orient Express from France to Italy in a twin cabin that starts at $3,600 a person.
The couple, who live in Winter Garden, Fla., paid around $1,000 total for the ride because Mrs. Mains received a credit for the experience through her work.
They visited Disneyland Paris and stayed at a Disney-owned hotel. They spent money on a wine and biking tour in the Burgundy region of France. Mrs. Mains purchased jewelry and accessories at a Gucci store in Italy.
There also were smaller indulgences: Many nights the couple bought a bottle of wine to enjoy from their hotel room while taking in the view. On past trips, they opted for cheaper bottles—around €3 or €4—but this time they went with more expensive offerings because of the strong dollar.
“In the past, we would have gone into that trip with a budget and said, ‘We can get three drinks,’” Mrs. Mains says. “But we basically decided to do whatever we wanted.”
Alyssa Brown, a 26-year-old design researcher flew from Chicago to Paris for 24 hours with one goal: securing a Saint Laurent bag she has been eyeing as an investment piece for a long time.
When she switched jobs in April, she put together a plan.
“I was having this change that I was going through, and I wanted something to commemorate the occasion,” she says.
As the dollar was surging against the euro, Ms. Brown flew standby to Paris in April using her partner’s benefits as an airline employee. In Paris, Ms. Brown paid a total of $1,833 for a Saint Laurent Sunset medium chain bag—about $700 less than its $2,550 list price stateside, she says.
Overall, travelers from the U.S. spent 56% more money in Europe in June than they did during the same period in 2019, according to VAT refund provider Planet. Richemont, which owns Cartier and watchmaker Vacheron Constantin, reported 42% higher sales in Europe in the quarter that ended June 30.
The company said the increase was driven by domestic demand and the return of spending by tourists from the Americas and the Middle East.
A more favorable exchange rate for Americans also helps take the sting out of some of the unavoidable costs of traveling, such as the rising price of hotel rooms.
The average daily rate for a hotel room in Europe was €154.41 for the 28-day period ended July 9, according to hospitality data and analytics company STR, up roughly 44% from last year.
Jennifer Baum, a marketing executive from New York, recently traveled to Amsterdam and Copenhagen to visit her son who is studying in Europe. When booking lodging for the trip, Ms. Baum says that hotel prices were higher than she expected.
But because the dollar was strong compared with the euro and the Danish krone, Ms. Baum says she felt she got value out of her stay.
“When I got my bill at the end, I wasn’t shocked,” she says.
Kristen Taylor says she is already trying to get back to Europe after just visiting.
The retired high-school teacher and debate coach from Stuart, Fla., recently took an 11-day trip through Europe with EF Tours, a company that specializes in educational trips. The tour visited five countries, starting in Paris and ending in Vienna.
Lunch, dinner and activities were included in the cost of the tour, but Ms. Taylor says she indulged in more expensive purchases than she usually does when she visits Europe. In Paris, she sampled escargot.
When the tour visited Fragonard, a famous perfumery, she bought herself a bottle of a scent she loved. At Nymphenburg Palace in Munich, she bought a porcelain flower necklace.
Ms. Taylor already has another 10-day vacation in Rome set for September. And with the exchange rate as advantageous as it is now, she is considering tacking on another trip later this year.
“One of my favorite things to do was take a week in Paris, and just go to museums,” she says, envisioning another trip to Europe.
Madeline Sadlowski, 26, flew to Italy in June for a honeymoon trip to Rome, Tuscany and Capri.
Mrs. Sadlowski and her husband didn’t check the exchange rate before arriving and only noticed how close the U.S. dollar was to the euro when they arrived.
During the trip, Mrs. Sadlowski hunted for a luxury handbag that her husband promised as a wedding gift. She ended up buying a Bulgari bag with exotic leather for about $2,750, which is priced in the U.S. for over $4,000 on Bulgari’s website.
“We originally weren’t budgeting that much money to buy a handbag,” she says. She also got savings from getting a refund of the value-added tax, a way for non-European Union residents to claim tax refunds on certain items.
Considering the exchange rate and cheaper prices on luxury items, Mrs. Sadlowski ended up making a few extra purchases during the trip such as more expensive wine and Hermès sandals that she originally didn’t plan to buy.
“It was hard to resist after a bunch of Aperol Spritzes and the price difference,” she says.
Dollar Bulls Should Be Careful What They Wish For
The greenback is beating all other investments, but for all the wrong reasons.
The Dollar Drinks Your Milkshake
For all of America’s many problems, its currency has arguably been the world’s best investment over the past year
Because, duh, I guess: The greenback is “the world’s primary reserve currency,” as Jared Dillian notes, the medium of exchange for almost every deal under the sun. Its status as the world’s special butterfly is at the root of the “Dollar Milkshake Theory,” created by Brent Johnson of Santiago Capital. Here’s a simplified version:
* All Currencies Are Doomed Because They’re Not Actually Valuable.
* The Dollar Is Slightly Better Because It’s The Favorite Child.
* When The Fed Stops Making More Dollars — The Frothy “Milkshake” Of The Title — Demand For Existing Dollars Goes Up.
For now, at least, this theory can’t seem to lose. The Bloomberg Dollar Spot Index has risen as much as 16% since May of 2021, and retail investors are frantically chasing bucks like so many meme stocks, Jared writes.
He’s skeptical, calling it “the oddest trade to form a cult around,” because its culmination would essentially mean a collapse in every other investment. Then again, it wouldn’t be the first doomsday cult.
The Dollar Bulls Are Looking Increasingly Like A Cult
It’s hard to boil the $6.6 trillion foreign-exchange market down into a simple narrative. But that hasn’t stopped people from trying.
The U.S. dollar has appreciated against every Group of 10 currency this year. It’s done even better on a longer-term basis, with the Bloomberg Dollar Spot Index rising as much as 16% since May 2021 — a massive move for a developed-economy currency.
Naturally, betting on gains in the greenback has acquired a huge following, even among retail investors, gaining a cult-like status almost equal to the self-described “apes” that cheerlead for meme stock AMC Entertainment Holdings Inc.
If you’ve spent any time on Twitter you might know that thousands of people have subscribed to the “Dollar Milkshake Theory” coined by Brent Johnson of wealth management firm Santiago Capital.
The theory is that all fiat currencies are flawed, and ultimately doomed to obsolescence because they are rooted in debt and not backed by any absolute store of value.
But the dollar is less flawed than the others, because it is the world’s primary reserve currency and most global transactions, especially in the commodities market, are conducted in dollars.
When the Federal Reserve begins to withdraw liquidity from the system via quantitative tightening, it becomes a net seller of US Treasury securities, which serves to constrain the amount of dollars in circulation.
At the same time, the demand for dollars is increasing among borrowers who need them to make interest payments on the vast amount of dollar-denominated debt. Hence, the value of the dollar will increase over time.
On the surface, the theory seems to be working. But in the world of foreign-exchange, where $6.6 trillion trades hands each day, it’s hard to definitively connect cause and effect. The dollar could be rallying for any number of reasons.
You might find it counterintuitive that the dollar is rallying when everyone seems to be saying an economic recession in the US is imminent, if it’s not already in one. However, inflation rates are high and the Federal Reserve has been more aggressive than other major central banks in tightening monetary policy to combat inflation.
That has made interest rates in the US much higher and more attractive than most anywhere else in the developed world, luring money to the dollar. So maybe dollar strength is simply a function of interest rate differentials, as is the case with most currency movements. Whatever, the reasons, Johnson and his milkshake theory adherents are pretty happy these days.
At this point, what would cause the dollar’s rally to end and for the currency to weaken? The first would be if Fed suddenly began to ease monetary policy, which would put dollars back into the financial system.
Interestingly, the dollar has declined a bit in the last few trading sessions, perhaps in connection with speculation that the Fed may have to start reducing rates at some point next year due to a recession, or that the rally needed a break after the euro fell below parity to the dollar for the first time since 2002. It’s too soon to declare the trend in dollar strength over, but the recent weakness is noteworthy.
I analyze markets from the framework of sentiment, and I have been observing bullish sentiment on the dollar building steadily over the last year to the point where it’s now at an extreme level. Google the phrase “Dollar Milkshake Theory” and what pops up in the suggested searches box is “How do I invest in dollar milkshake theory?”
The only thing missing is an Economist cover on the strong dollar, much like the one in December 2016 that featured a muscle-bound George Washington.
The only problem for the dollar bulls is that the currency soon experienced a period of protracted weakness after that magazine cover.
Being long the dollar is the oddest trade to form a cult around. The only real way to express a long dollar thesis in the market is via the Invesco DB US Dollar Index Bullish Fund exchange-traded fund.
It had risen as much as 14.2% from its low in mid-January through July 14. Speculative sentiment usually forms around things that are more, well, speculative, with the potential for a lot more gains, like Tesla Inc. or the ARK Innovation ETF.
Johnson and his adherents have a provocative worldview, one in which the strong dollar is a “wrecking ball” that destroys other currencies and related assets. This is the “macro doom” that I have written about, that the dollar will become progressively stronger, and the result will be a crash in stocks and other risky assets. A strong dollar view is essentially a pessimistic view.
And the theory may be correct, but like all trades it can easily fall out of favor for a period of weeks, months or even years. That is what inevitably happens when sentiment gets extremely hot — and it may be happening now.
Retail Investors Pile Into Currency Trading As Euro Slides To Parity With Dollar
Amateurs are diving into the risky world of foreign-exchange markets.
Americans looking to capitalize on the unusually weak euro aren’t just booking shopping trips to Europe: They’re making risky bets on the currency market.
While foreign-exchange trading has historically been reserved for specialty desks on Wall Street, big swings in global currencies have enticed DIY traders into the complicated world of FX.
The euro in particular has caught their attention with its swift downward spiral, dropping last week to dollar parity for the first time in 20 years.
A tumultuous year for the region — from the war in Ukraine to an energy crisis and the growing risk that Russia cuts off gas exports — is increasingly likely to push the euro zone into a recession, while higher interest rates in the US are making the dollar look more attractive by comparison.
Greg Doscher, a 40-year-old retail trader in Santa Barbara, California, has seen a 322% gain after pooling approximately $10,000 on a short position on the euro that he opened in late January.
Despite soaring inflation, he argues the European Central Bank won’t act as aggressively to raise rates as the US Federal Reserve, further strengthening the dollar.
“It’s just kind of a wild experiment,” he said. “As yields started to go up and spike in the US, it just seemed pretty obvious that there was going to be a flow of money out of the euro and into the dollar. It opens up these kinds of crazy differentials.”
Betting On The Dollar
Shawn Cruz, director of derivative product strategy at TD Ameritrade, said he’s noticed retail clients are “hyper focused” on the strength of the US dollar. Bullish bets on the greenback have garnered a cult-like following among retail traders online, similar to the meme-stock frenzy for Game Stop Corp. and AMC Entertainment Holdings Inc. last year.
Traders outside the US are also getting into the action. Online brokerage eToro, which has users in more than 100 countries but doesn’t offer FX trading in the US, saw a 79% increase in positions opened in the euro-dollar market in the first two weeks of July compared to the same period in June. There’s also been a 72% month-over-month increase in trading volume.
“Euro-dollar parity is the biggest line in the sand in global currency markets, and retail investor interest has surged as its breach has neared,” said Ben Laidler, a global market strategist at eToro. “With lots of markets in freefall or stagnant this year, opportunities for investors have been limited, but USD has been one of these opportunities — and retail investors have responded.”
Traders have been wagering that the strong dollar will hurt US-based tech companies, which get a big chunk of their earnings from abroad, Cruz said. They’re also betting that a rallying US currency will put downward pressure on commodity prices, which are usually priced in dollars and therefore fall as the greenback strengthens.
Retail traders seeking exposure to currencies often use exchange-traded products, or options on those products. For example, they might use options contracts to bet against European equities that are likely to be hurt by weaker growth in the euro zone.
Financial experts caution that wading into the foreign-exchange market can be risky due to the inherent volatility of currencies.
The saying “caveat emptor,” or buyer beware, applies to currency trading even more than it does to traditional financial markets, according to Chris Zaccarelli, the chief investment officer at Independent Advisor Alliance.
Another issue is the “potential for FOMO trades” among retail investors, according to Andy Constan, chief executive officer of Damped Spring Advisors. The common currency jumped above the dollar once again and rose to a two-week high on Tuesday, with markets pricing in a more aggressive pace of interest-rate hikes from the European Central Bank.
“The euro has already fallen a lot, so the time to get in and make a profit has already happened,” he said. “To get on the bearish euro train at this late stage is not a good idea.”
Bitcoin Lurks By $22K As US Dollar Falls From Peak, Ethereum Gains 20%
It’s all about Ethereum for crypto traders on the day as Bitcoin faces crucial resistance and a slew of sellers lying in wait.
Bitcoin (BTC) hugged $22,000 on July 19 as macro conditions slowly turned to favor risk assets.
Stocks, Crypto Rise As Dollar Weakens
Data from Cointelegraph Markets Pro and TradingView showed BTC/USD cooling volatility immediately below the crucial 200-week moving average (WMA).
The Wall Street open saw further gains for United States equities in the face of a declining U.S. dollar, which extended its retracement after hitting its latest two-decade peak.
The U.S. dollar index (DXY) stood at around 106.5 at the time of writing, down 2.6% from the high seen July 14.
For Bitcoin analysts, it was thus a case of wait and see as markets bided their time between buy and sell levels.
These are the options on #Bitcoin right .. If we can sustain above the $21,700 range high and gain momentum, we can pump for the wave 3 ..
However, if we die down i am looking for another corrective wave down .. pic.twitter.com/cLGVGdTivK
— Crypto Tony (@CryptoTony__) July 19, 2022
“Shared this chart before, but just like that the $DXY is tanking, resulting into risk-on assets showing some momentum,” Cointelegraph contributor Michaël van de Poppe tweeted in an update on the day alongside a DXY chart.
“Yields need to drop now too, but the weakness on the Dollar could put more strength on crypto and Bitcoin.”
On-chain monitoring resource Material Indicators, meanwhile, flagged the difference in strength between “psychological” levels such as $21,000 and $22,000 and the 200 WMA closer to $23,000.
“IMO, resistance at $21k and $22k are psychological, whereas the 200 WMA serves as legit technical resistance. FireCharts shows more BTC bid liquidity coming in to support an R/S flip at $21k,” it told Twitter followers on the day publishing data from the Binance order book.
“Looking for more bid liquidity to challenge the ever important 200 WMA.”
The Day Belongs To Ethereum
Deja vu for altcoin traders, meanwhile, came in the form of outperformance from Ether (ETH) versus other major cryptocurrencies’ intraday gains.
ETH/USD, already up 25% in a week, added to its momentum overnight, climbing another 20% in just over 24 hours to briefly pass $1,600.
Resistance in the form of the 2018 high at $1,530 posed little problem for bulls, with the level forming a support focus at the time of writing.
“Ethereum relative to Bitcoin has closed above a key resistance,” popular trading account Game of Traders forecast.
“Buckle Up For Some Big Moves.”
Strong Dollar Fuels Pullback In Commodity Markets
Prices of raw materials such as oil, coffee and copper have retrenched.
The bull run in commodity prices is meeting stiff resistance from a surging U.S. dollar.
Prices of oil, metals and agricultural products have tumbled since early June after shooting up in the wake of Russia’s invasion of Ukraine. In part, the recent fall reflects investors’ fears that a demand-busting recession is around the corner.
But it is also because most commodities are priced in dollars. That means a rallying dollar makes them more expensive for buyers around the world and drags on demand.
Fueled by the Federal Reserve’s interest-rate increases and worries about the world economy, the dollar has risen to its highest level since 2002, according to the WSJ Dollar Index, which measures the greenback against a basket of currencies. Few expect the Fed to back off its campaign of rate rises until next year.
“If oil is expensive in dollar terms and the dollar strengthens, then it gets even more expensive [for holders of other currencies],” said Giovanni Staunovo, an analyst at UBS Global Wealth Management.
If the dynamic holds and commodity prices remain under pressure, that could help tame inflation and spare the Fed from having to raise interest rates so quickly and so far that the U.S. economy is tipped into a recession.
Consumers are already getting some relief. The commodity selloff is pulling down gasoline prices at the pump and has some investors hoping that consumer-price inflation in the U.S. peaked in June.
Data on car usage and air traffic give few indications that demand for fuel is taking a hit in major importers like China and India, said Damien Courvalin, head of energy research at Goldman Sachs Group. But that is bound to change as higher prices take a toll on consumers, he said.
The bank estimates that the strength of the dollar has boosted retail fuel prices in countries such as India by the equivalent of $10 a barrel. A shortage of refining capacity is adding an extra $15 a barrel, Goldman says.
The International Energy Agency this month said the dollar’s strength, combined with record prices for refined fuels, is likely to weigh on oil demand in emerging markets.
When the price of Brent crude peaked in early June, they were up 59% in dollar terms. But they were up by two-thirds in terms of China’s yuan, and 85% measured in Japanese yen.
A stronger dollar isn’t just adding to the cost of buying raw materials outside the U.S. It is also likely to encourage non-American commodity producers to sell down inventories, since their earnings are worth more when converted into domestic currencies. In one sign of this, supplies of coffee have risen in Cameroon.
The rampant dollar is making it difficult for some countries to afford imports. For example, in Argentina, a shortage of the U.S. currency has led to fewer import licenses for coffee being issued by the government, said Carlos Mera, an analyst at Rabobank.
“There is fear of scarcity of coffee” in the country, he added.
Commodity and currency markets have a complex relationship. Historically, raw-material prices have been negatively correlated to the U.S. currency, meaning they have zigged as the dollar has zagged.
That is not just because a stronger greenback crimps demand. For copper and grains, labor and other inputs are mostly paid in local currencies. Production costs, therefore, decline when currencies such as Chile’s peso or the Canadian dollar weaken.
For oil, the picture has gotten more complicated in recent years after the shale revolution turned the U.S. into a major energy exporter, and as oil-producing countries in the Middle East began to plow more of their petrodollars into U.S. assets.
In the past year, the recovery in the world economy from pandemic restrictions sent oil prices higher just as the dollar took off.
The negative relationship between oil prices and the dollar has reasserted itself since June. Brent crude has fallen 14% from its June 8 high to about $106 a barrel. In that time, the WSJ Dollar Index has added 3.8%.
At the same time, fears of a recession prodded investors to unwind bets on commodities including oil and copper, said Caroline Bain, commodities economist at Capital Economics. They had piled into these wagers earlier in 2022 as a hedge against inflation, she said.
What A Strong Dollar Means For The Rest Of The World
Investors are drawn away from emerging markets, and governments that issue debt in foreign currencies face greater risks.
The U.S. dollar is stronger than it has been in decades and the effects of its rapid rise are reverberating across the globe.
The WSJ Dollar Index, which measures the greenback against a basket of 16 currencies, rose 8.7% through June to notch its best first half since 2010. It is up another 1.4% this month through Thursday.
While currencies in emerging markets typically feel pressure when investors flock to a strong dollar, those of developed countries also have fallen. The euro slid below parity with the dollar last week, hitting its weakest level since 2002.
The dollar’s run has been driven largely by rising U.S. interest rates. The Federal Reserve approved a 0.75-percentage-point rate increase in June, the largest since 1994, and officials have signaled they are likely to raise rates by the same amount later this month.
Investors are also drawn to the U.S. as a source of relative stability amid weak overseas economic conditions. When putting money into American stocks and bonds, foreign investors typically use dollars, which boosts the U.S. currency.
Some central banks in emerging markets also have been raising interest rates in an effort to combat inflation. Brazil’s central bank, for example, began a tightening cycle of its benchmark interest rate in March 2021, when the rate was at a record low 2%. That rate reached 13.25% in June.
Emerging markets had $4 billion in net outflows in June, according to estimates from the Institute of International Finance, a Washington-based organization representing the global financial industry.
Outflows excluding China have been on par with previous macroeconomic shocks, according to IIF chief economist Robin Brooks, including the “taper tantrum” in 2013 when the Fed indicated it would wind down a bond-buying program. Outflows remain below those seen at the start of the Covid-19 pandemic.
Countries that issue debt in foreign currency are at risk when their currencies depreciate because that debt becomes more expensive to pay off. Governments that default on their debt risk losing access to international markets and the ability to finance critical functions.
Sri Lanka, for example, fell into default in May. A combination of crushing debt and rampant inflation has left the country without U.S. dollars to pay for imports of basic goods such as fuel and medicine.
Emerging-market countries have varying degrees of their debt in dollars. Dollar-denominated debt issued by governments in Argentina, Ukraine and Colombia all exceeded 20% as a share of their gross domestic product as of the first quarter, according to the IIF, while that figure is below 2% for a handful of Asian and European countries.
“Every country that has large liability in dollars is a cause for concern,” said Marcello Estevão, the World Bank’s global director for macroeconomics, trade and investment.
Governments can hedge their risk against currency depreciation by holding assets in foreign currencies.
This ability to hedge risks can make emerging-market governments more resilient to periods of currency depreciation than in the past, said Mr. Brooks of the IIF, and many have navigated the pandemic without systemic breakdowns. Smaller economies such as those in sub-Saharan Africa are more vulnerable, he said.
Countries that are net exporters, or export more than they import, can also fare better against a strong dollar because they have access to U.S. currency and are less reliant on imports with rising prices.
BTC And ETH Outperform Traditional Markets In July Despite The Dollar’s Strength
The latest price moves in crypto markets in context for July 25, 2022.
* Bitcoin and ether have outperformed traditional markets by a big margin this month.
* The top cryptocurrencies have chalked up double-digit gains despite the dollar’s strength, deviating from its record of moving in the opposite direction of the greenback. The dollar index, or DXY, which gauges the greenback’s strength against major fiat currencies, was up 2.5% for the month at press time. Still, it may be too early to say bitcoin has decoupled from the dollar. The 90-day correlation coefficient between the two stood at -0.65 at press time, indicating a negative or inverse relationship.
* The dollar may reassert its dominance if the Federal Reserve downplays the “inflation-has-peaked” narrative later this week, forcing markets to reprice continued aggressive monetary tightening for the rest of the year.
* “Things have to get far more critical before that [Fed pivot] event occurs. This allows room for dollar dominance,” Francis Hunt, founder and director at The Market Sniper, said during an interview with Real Vision Crypto.
Hedge Fund EDL Sees Euro Sliding To 80 US Cents In Bold Bet
* Edouard De Langlade Of EDL Sees Chances Of ‘Euro Bear Market’
* Euro-Area Faces Pressure From Gas Shortages, Politics
Macro hedge fund EDL Capital is betting that the euro will plunge to levels not seen since the early days of its inception over 20 years ago, as rampant inflation feeds instability in politics and bond markets that could test the region’s cohesion.
That could cause the start of a “euro bear market” in a shift from the current bout of dollar strength that’s weakened the common currency, said Edouard de Langlade, the founder of EDL.
He argues Russian gas supply risks will drive up record inflation, forcing aggressive rate hikes at a time of recession and causing Germany to potentially baulk at the costs of keeping the euro zone together.
“Europe is on the brink of disaster, which could potentially lead to its breakup,” de Langlade told clients in a letter this month seen by Bloomberg.
“We could move to a place where the dollar is not strong against everything but the euro gets weak against everything,” he said, targeting the euro at 80 US cents.
The money manager, who runs $751 million at his macro hedge fund, is known for his big and bold bets.
While de Langlade, who previously traded for Moore Capital Management, has mostly made money for his clients since starting the fund in 2015, he suffered record losses in February because of his Russian bets.
The combination of a surging dollar, fueled by Federal Reserve tightening, and European risks have seen the euro already fall past parity this month for the first time in 20 years.
De Langlade sees further declines, close to the level where the European Central Bank intervened to strengthen the euro in 2000.
Now the ECB is starting a rate-hiking cycle this month that exposes the vulnerabilities of the diverse economies in the euro area, a decade after former ECB chief Mario Draghi vowed to do whatever it takes to preserve the euro.
The fear is that traders force the borrowing costs of more indebted nations such as Italy to spike by betting against their bonds.
To combat the fallout, the ECB has unveiled a tool that would enable it to buy the bonds of countries facing surging sovereign yields due to market speculation, subject to certain conditions. But the expense of doing so may just be too much, de Langlade argues.
“Europe does not have a common treasury and the cost of keeping Europe together is high,” he said in the letter. “It is very possible that once the Germans are in financial difficulties of their own, they will refuse to do whatever it takes to keep spreads tight.”
De Langlade said the dollar’s strength could fade, ending its appreciation against commodity currencies.
Betting against the euro via the Canadian dollar or the Australian dollar could then be a “great way to play the theme,” he wrote, with the common currency still falling thanks to high energy prices.
European economies are already suffering due to shortages in Russian gas supplies, while the collapse of Draghi’s coalition government in Italy is amplifying concerns over further political turbulence.
De Langlade also cited the forced resignation of the UK’s Boris Johnson and votes for extremists in France.
“Regime change is happening in Europe,” he said.
Strong Dollar Always Clobbers Developing Nations
History offers centuries of proof that overseas borrowing courts chaos when the US currency surges.
The dollar is strong and getting stronger, hitting 20-year highs relative to a basket of other currencies. As my Bloomberg Opinion colleague Tyler Cowen recently noted, this is a vote of confidence in the US.
But history demonstrates that it’s also likely to be a harbinger of hard times for much of the rest of the world.
When the dollar appreciates, the cost of servicing debt in other countries, particularly emerging markets, can easily become unsustainable because their debts aren’t denominated in their own currencies; instead, they owe in dollars, or in earlier eras, gold or pounds sterling.
As those instruments gain in value, crisis and collapse often follow for the debtors, and have for a century-and-a-half.
The economists Barry Eichengreen, Ricardo Hausmann and Ugo Panizza have dubbed this problem “original sin.”
In a series of now-famous articles, they showed how the dependency on foreign-currency borrowing — and dollar-denominated debt in particular — have handicapped developing nations, making it next-to-impossible for their domestic policy makers to use monetary and fiscal policy when exchange rates turned against them.
Like its theological counterpart, the economists’ version of original sin held that the inability to borrow abroad in one’s own currency was the fountainhead of problems that now bedevil emerging economies: capital-flow volatility, liquidity crises, lower credit ratings and general instability.
That’s why the sin is original: It came first. It predates many countries’ modern-day reputations for profligacy.
In fact, it began as early as the late 18th century, when many nations began borrowing on international markets. With a handful of exceptions, they did so in British pounds or gold coin.
Why did this happen? Eichengreen and his collaborators contend that original sin is the product of something banal: transaction costs.
In a global financial system made up of scores of different national currencies, it made sense to denominate debt in ways that transcended local monetary systems.
In the 19th century, this meant defining debt in gold or a foreign currency such as the pound sterling, which enjoyed the same widespread circulation then that the dollar does today.
But this had disastrous consequences, particularly for countries in Latin America. For close to a century after 1820, Argentina, Brazil, Mexico and others endured financial crises fueled by foreign currency debt.
It didn’t matter if these nations developed strong financial institutions and policies. When the exchange rate turned against them, they were often forced to default.
This happened enough times that it soon came to seem that the problem lay with the countries in question, not the nature of the debt.
Though countries could protect themselves against this fate by accumulating hard currency reserves, this handicapped them in other ways, limiting the tools available to central bankers and policymakers.
Original sin also caused other problems for countries operating under its shadow. When one emerging economy collapsed, international investors abandoned the bonds of all emerging economies.
For example, when Argentina defaulted in 1890, every country in Latin America sustained major increases in borrowing costs, regardless of the economic and institutional conditions on the ground. Investors threw the good out with the bad.
The same conditions prevailed in the 20th century, with the dollar succeeding the pound as a monetary lingua franca. In the 1970s, for example, high inflation, a weak dollar and growing quantities of dollar-denominated debt set countries like Mexico up for disaster.
It happened after US Federal Reserve Chair Paul Volcker began ratcheting up interest rates to control runaway inflation.
Between the middle of 1980 and early 1985, the dollar’s value relative to other currencies soared by 77 percent. Mexico and other countries became casualties as the cost of servicing their debt became unsustainable.
This pattern has repeated itself in subsequent episodes. Mexico sustained another foreign-debt crisis in 1994, as did a number of Asian countries in 1997, Russia in 1998 and Argentina in 2002.
Then the dollar began a period of general decline for nearly two decades, during which the sole serious financial crisis was unrelated to the wages of original sin.
Moreover, though dollar-denominated sovereign debt remains common, it doesn’t play quite as significant a role in financial markets as it once did: some developing countries have managed to issue debt in their own currencies.
This might suggest that we won’t see a replay. But that provides them only limited protection. Many corporations in those regions cannot arrange for financing via long-maturity, fixed-rate loans denominated in local currencies.
Instead, they go abroad for financing, often borrowing in dollars. This is “domestic” original sin, but sin nonetheless.
The scale of this borrowing has grown significantly since 2007, when it amounted to less than 10% of the world’s gross domestic product.
It’s now in excess of $12 trillion, or 14% of global GDP, and rising. That worked well so long as the dollar remained in the doldrums. But that’s not the case any longer.
Perhaps the Fed will decide that an emerging-market meltdown is too high a price to pay for taming inflation.
But if Fed Chair Jerome Powell pulls a Volcker and the dollar continues to strengthen, emerging economies will be reminded, yet again, that they live in a fallen world.
The Strong U.S. Dollar Is Extending Pain In Emerging-Markets Currencies
With the dollar still rallying, currencies in Hungary, Poland and elsewhere are hurting.
Investors are betting the U.S. dollar’s prolonged rise will hurt currencies ranging from the Hungarian forint to the Philippine peso, with the forint and the Polish zloty hitting fresh lows recently.
The extended losses are another example of how the dollar’s strength is rippling through emerging-markets currencies and pressuring central banks across the globe to increase rates—even at the cost of a recession.
“Trouble is coming in emerging markets,” said Megan Greene, global economist and senior fellow at the Harvard Kennedy School, pointing toward Sri Lanka’s sovereign-debt crisis and drained foreign-exchange reserves. “It’s a familiar story in emerging markets and a sneak peek of what’s to come.”
Wall Street firms that buy and sell currencies said clients have been increasingly focused on the ramifications of a stronger dollar. The WSJ Dollar Index, which measures the dollar against a basket of 16 currencies, is up more than 12% over the past year.
Worries about runaway inflation, fears of a global recession and a Federal Reserve moving aggressively to curb rising consumer prices have pushed the world’s reserve currency to multidecade highs. Its rise has outpaced analysts’ estimates, and many expect the greenback to run higher through year-end.
A strong dollar typically sends emerging-markets currencies into a tailspin. But this time around, emerging markets remained resilient throughout the first stage of the dollar’s rally, weathering external shocks such as Russia’s invasion of Ukraine in February and sharp moves in U.S. bond markets as the Fed reversed easy-money policies.
The narrative began to shift in June, when money managers started selling the South African rand and Brazilian real after buying them earlier in the year.
The move lower coincided with softening commodity prices, removing the pillar that supports emerging-market economies backed by high-value exports such as copper and oil.
Now, Goldman Sachs Group Inc. strategists said, “cracks are appearing” in emerging-market currencies after more than a year of beating returns against a basket of nine major currencies, including the Swiss franc and Canadian dollar.
“In recent days we continue to field questions about macroeconomic indications of emerging-market foreign exchange vulnerability,” said Kamakshya Trivedi, a Goldman analyst.
Hedge funds that bet on the direction of currencies are targeting Central European currencies next, labeling them as some of the most vulnerable because of the war in Ukraine. Portfolio managers are selling the forint and zloty as a wager on Europe’s potential energy crisis.
“If flows of gas are cut off this summer, those currencies will bear the brunt of it,” said Stephen Gallo, European head of foreign-exchange strategy for BMO Capital Markets.
The Hungarian forint and Polish zloty each lost as much as 6% at one point this month against the U.S. dollar. The Czech koruna is down over 2%.
Analysts contend the koruna is the most resilient currency in Central Europe because the Czech National Bank built a stock of foreign-exchange reserves after the 2008 financial crisis.
A weaker currency can escalate inflation, exacerbating price increases for countries already grappling with rocketing energy and food prices. The problem is more acute for emerging-markets economies, which use the dollar to trade foreign goods and commodities.
Part of the dollar’s strength comes because currency investors have few alternatives. A gloomy investor outlook on important U.S. trading partners, particularly Europe and Japan, is hurting currencies there.
Political tumult in Italy and rising gas prices across Europe are thwarting gains in the euro, which recently dipped below parity against the U.S. dollar for the first time since 2002.
How currencies fare can amount to a bet on whether investors think a country’s central bank will act aggressively to try to stop inflation.
Since the financial crisis, central banks worldwide slashed rates to near-zero to shore up markets and economies. Now they are moving at different paces to tighten borrowing conditions, breathing volatility into currency markets for the first time in decades.
Investors have pushed up the dollar in part because of the Fed’s tightening, which they think signals that the U.S. central bank will do what it takes to stop inflation. The value of the yen, meanwhile, has suffered because the Bank of Japan has kept easy-money policies in place.
Hungarian and Polish central banks have both raised rates in recent months, but with little effect on their respective currencies. Hungary’s central bank raised its key rate by 2 percentage points this month.
“Markets have a lot to digest,” said Seth Carpenter, chief global economist at Morgan Stanley. “Following the Covid shock, all major central banks were moving in the same direction, but no longer.”
The euro is down more than 10% year to date. Even though the European Central Bank raised rates for the first time since 2011 last week, the currency is failing to make significant gains because the ECB’s key interest rate is still at zero. The Fed on Wednesday raised its benchmark rate to a range between 2.25% and 2.5%.
The dollar lost some gains over the past week as investor expectations about the path of future interest-rate hikes diverged.
Some money market managers are betting the Fed will reverse course and loosen borrowing conditions by the start of 2023. Lower rates would typically pull the dollar off its highs.
Bitcoin Holds $24K As USD Taps 3-Week Lows On Eurozone Inflation Report
Estimates for July inflation across the euro area make for grim reading at 8.9%, with the U.S. dollar rebounding.
Bitcoin (BTC) sought to pin $24,000 as support before the July 29 Wall Street open as fresh inflation data sparked worries for the euro.
Eurozone Inflation Estimate Shows No Peak
Data from Cointelegraph Markets Pro and TradingView showed BTC/USD maintaining most of its latest gains after spiking to nearly $24,500 overnight.
The day’s macro action delivered painful news for the European Economic Area (EEA), as the latest estimates for euro inflation came in at 8.9% for July — still climbing from June’s 8.6%.
“Looking at the main components of euro area inflation, energy is expected to have the highest annual rate in July (39.7%, compared with 42.0% in June), followed by food, alcohol & tobacco (9.8%, compared with 8.9% in June), non-energy industrial goods (4.5%, compared with 4.3% in June) and services (3.7%, compared with 3.4% in June),” an accompanying report compiled by Eurostat read.
The data provided a curious contrast in some European Union member states, where growth outperformed expectations despite the highest inflation figures in the history of the euro’s existence.
This led some commentators to suspect that all was not what it seemed.
The European Quandary, nonetheless, buoyed the United States dollar, which had been retreating from its latest two-decade highs against a basket of trading partner currencies through July.
The U.S. dollar index (DXY) touched 105.54 on the day, its lowest reading since July 5, before rebounding to near 106 at the time of writing.
A key inverse correlation for crypto markets, additional DXY advances could signal fresh pressure on BTC price action.
“DXY just dropped to the previous high now support and seems to be holding. A possible bounce here to 107, 108 before further drop,” popular trading account Mikybull Crypto predicted in a fresh Twitter update, adding that this scenario would entail a pullback to $22,800 for BTC/USD.
In an arguably unexpected bullish turn, meanwhile, Arthur Hayes, ex-CEO of derivatives platform BitMEX, implied that a weaker dollar was now imminent.
Following the Federal Reserve’s latest key rate hike, Hayes stated that the central bank’s return to accommodative monetary policy and more neutral rates had now begun.
Fed Chair Jerome Powell, he wrote on July 28, would not be increasing hikes any longer, something he called the “Powell pivot.”
The Powell Pivot is here, my body is ready and so is my portfolio. pic.twitter.com/hlI8lzqLcX
— Arthur Hayes (@CryptoHayes) July 28, 2022
The theory, as Cointelegraph recently reported, revolves around the Fed having little room left to maneuver thanks to rate hikes increasing the likelihood of a deeper recession in the U.S. economy.
The latest GDP data released this week had already placed the U.S. in a technical recession thanks to two straight quarters of negative numbers.
Dollar Starting To Show More Weakness
Bitcoin’s biggest nemesis, the dollar index (DXY), also traded weak early Monday, offering positive cues to the cryptocurrency.
The DXY hovered around 105.70, down 0.7%, hinting at an extension of the slide from the 20-day high of 109.29 reached on July 14.
If the real yield and the dollar continue to lose ground, that could add to demand for bitcoin.
A recently released Bank of America (BAC) survey of fund managers, conducted July 8-15, showed dire levels of pessimism and increased cash holdings – potentially adding to buying pressure.
“There’s a lot of pent-up buying pressure in risk assets, including crypto,” analysts at crypto options platform Genesis Volatility wrote in Sunday’s edition of the market analytics note.
A Strong Dollar And Weaker Chinese Yuan Both Drag Down Gold
Analysts assumed that gold would soar when inflation rose, but it hasn’t worked out that way.
China’s yuan has depreciated against the dollar. That is bad news for gold bugs.
Gold futures have sagged for several months, and investors often like to cast the blame on higher interest rates. Many risk-averse investors who might buy gold are instead buying U.S. Treasurys, since those yields have risen this year as the Federal Reserve has raised rates.
But China plays a big role, too, according to Goldman Sachs chief commodities strategist Jeff Currie. That is because Chinese consumers account for almost one-third of global retail gold purchases, Mr. Currie said, and a weaker yuan reduces their purchasing power.
According to his research, the yuan has the largest impact on gold among major currencies, followed by Thailand’s baht.
“As the Chinese yuan fell, gold followed it lower,” Mr. Currie said.
The yuan has declined for the past five months as of the end of July—its longest losing streak since October 2018. Both the onshore and offshore Chinese currencies have lost more than 5% against the dollar year to date. Traders are worried about the Chinese economy, where growth has slowed thanks to Covid-19 lockdowns and plunging home sales.
Gold, meanwhile, has fallen for the past four months. The most actively traded gold futures contract closed Friday at $1,772.90 per troy ounce, down more than 13% from highs seen in March.
Hedge funds and other speculative investors who sought to protect their returns against inflation have pulled back bets on rising gold prices, reflecting a growing belief that the Fed will do whatever it takes to tame inflation.
Earlier this year, gold benefited from turmoil in financial markets as consumer prices surged and signs of geopolitical turbulence emerged in Europe.
Many investors favor gold during economic crises because it can act as a shield against inflation, and asset managers expect gold and other safe-haven assets to hold their value when markets turn sour.
It hasn’t worked out that way recently. Despite prolonged inflation and continuing tensions between Russia and Ukraine, the precious metal is stuck—the latest example of how the Fed’s interest-rate increases are rippling across the globe.
Higher U.S. government bond yields, a byproduct of the Fed’s rate increases, have supercharged a dollar rally. Though the WSJ Dollar Index slipped earlier this week, it recuperated losses Friday and is still up nearly 10% this year. That pushes down the value of other currencies, like the yuan.
It also makes gold more expensive for overseas buyers. One knock-on effect of the strong dollar is dwindling gold purchases from emerging-market central banks, which have to combat precipitous slides in their currencies by dipping into foreign-exchange reserves.
India’s central bank has had to spend its reserves to contain a plunge in the rupee—which fell as much as 6.9% this year.
Gold also competes for investors’ interest with government bonds, which are relatively stable and, unlike gold, offer regular payouts.
The 10-year Treasury yield, which tends to move in tandem with expectations for the Fed’s benchmark rate, has risen more than 1.3 percentage points this year. The 2-year Treasury yield has risen 2.5 percentage points.
The extent of the dollar’s rally this year has taken many on Wall Street by surprise, forcing strategists at investment banks to revise year-end estimates around the greenback.
“Hedge funds had initially looked to position long gold last year as inflation was rising and central banks had been slow to react with higher interest rates,” said Andrew Simon, chief operating officer and president at market analysis firm Macro Hive.
To be sure, the decline in the Chinese yuan hasn’t been as sharp as in some other currencies.
“The currency weakened because of the broad dollar rally and has been driven lower by three weeks of price action—otherwise it’s been quite static,” said Calvin Tse, head of Americas developed markets strategy at BNP Paribas.
Goldman previously expected gold to increase to $2,500 per troy ounce by the end of the year. In June, the Wall Street investment bank lowered its forecast to $2,300 per troy ounce.
But Mr. Currie maintains the precious metal will eventually move higher as concerns around slowing growth and recession mount going into 2023.
“We believe the bullish gold case was merely delayed rather than derailed,” Mr. Currie said in a note to clients.
Many strategists have revised their global growth forecasts lower. Bank of America Corp. economists expect a recession in about half of the world’s major economies.
Morgan Stanley Global economist Cristina Arbelaez said the outlook has “darkened significantly” and recession fears have increased since May.