Bid Farewell to the Strong Dollar

What goes up…falls like a brick. 

Remember that 2022 narrative about a strong dollar? Yeah, well, umm not so much now. 

Nearly 10 months it took for the greenback to gain 18%, as defined by the U.S. Dollar Index, which tracks the buck relative to a basket of major global currencies. And just over two months it has taken for the dollar to give back half of those gains. 

More decline is on the way. 

As we approach the end of the year, one of the predictions I’ve been telling you about for several months now is coming to fruition: Dollar strength is being revealed as nothing more than a mirage ginned up by the Federal Reserve amid its efforts to cement its place in American history as one of the most tone-deaf collection of central bankers yet. 

The Fed, as you well know, has been aggressively pushing up interest rates in its largely feeble effort to tackle inflation. Interest rates that were 0.25% a year ago are now 4% and will very likely be 4.25% or even 4.5% after the Federal Open Market Committee announces its last rate hike of the year later today.  

That’s the fastest the Fed has raised rates in more than 40 years. 

And it’s not really going so well. 

Inflation remains elevated at between 7% and 8%. 

Those radically higher interest rates have absolutely crushed the housing market. 

Consumers are accumulating debt at a pace last seen 20 years ago. Cumulative consumer credit card debt is now approaching $1 trillion, the highest level in history. And the average credit card interest rate is now 19.2%, according to Bankrate.com, the highest since 1985. 

Probably doesn’t need to be said, but these are not good numbers. 

They are decidedly bad numbers.  

They say the Fed is forcing already heavily indebted Americans to take on even more debt just to make ends meet. 

Alas, it’s quite likely to get worse. 

See, the Fed is a few short breaths away from putting the kibosh on its rate-hike lunacy, a fact the Fed already announced in the minutes of its November meeting. But that doesn’t mean that inflation has been neutered. Not even close. 

It simply means that Fed, whether it ever admits this or not, knows it cannot drive interest rates much higher from here because of the wealth it’s tangentially extracting from consumer pocketbooks. And from Uncle Sam’s pocketbook as well, given that our debt-addicted politicians have racked up history’s largest sovereign credit card bill. 

Inflation will remain a global problem that central banks simply cannot control because, frankly, it’s out of their hands.  

One: The world is awash in free cash after decades of global monetary policy so loose it would have offended Iran’s recently disbanded Morality Police. 

Two: Vladimir Putin’s war in Eastern Europe is having massive impacts on the global food and energy markets, and even once it’s over energy flows are never returning to normal. 

Three: Mother Nature has been playing angry with the weather and causing significant, even historic, droughts all over the planet that have hit the global food supply and have caused commodity prices to surge. 

So, inflation is destined to remain problematic for many more years. 

Yet, as I noted, the Fed has already indicated that the parade of rate hikes is nearing its end. 

Which brings us right back to the dollar… 

It has begun tracing a line back to where it began because the market realizes the Fed really has no capacity to jack up interest rates the way the Fed of the 1970s did when it was tasked with killing off robust inflation (interest rates topped out at 20% in 1980). 

In the quirky world of currencies, dollars and yen and euro and whatnot trade against each other based on interest rate differences. If one currency offers higher interest rates, traders will sell the lower-yielding currency to buying the higher-yielding one.  

As the Fed moves away from big rate hikes, the interest rate differential between the dollar and other major currencies is either going to narrow or at the very least stagnate. 

And in that world, the focus returns to the fact that the U.S. dollar is a fundamentally weak currency backed by nothing but debt and the promises of a government in which one party is already talking about holding the dollar hostage as a new debt-ceiling debate is teed up for 2023. 

Too much risk. (And if the debt-ceiling is not raised and America is forced to default on its debt…oh Nelly, 2023 is gonna be one hellaciously ugly year for the greenback!) 

So, the dollar is already retreating. 

That will continue as 2023 unfolds. 

Which means all those imported goods that we buy in America are going to see bigger price tags in the new year…which means heavily indebted consumers face more price inflation just because the value of the dollars in their wallets are shrinking relative to other currencies. 

Best thing you can do to protect yourself against some of this dollar decline is own currencies that will rise against the greenback, such as the Swiss franc. 

Like I said, what goes up, comes down like a brick when the updraft supporting the rise stops blowing. And we are very near the end of the Fed stopping the updraft of ever-higher interest rates.