Digest: Why the Dollar Just Suffered its Biggest Monthly Loss in a Decade

Welcome to your Sunday digest…my breakdown of the things we’re thinking about and talking about in the Global Intelligence world. 

First up this week, the beginning of a larger, long-term trend for the dollar… 

This has been a bumper year for the U.S. dollar. The greenback is up around 10% on the year against a basket of major world currencies, and has hit multi-decade highs against the euro. 

The reason for this is the Federal Reserve’s aggressive interest rate hikes aimed at tackling inflation. 

The Fed has been raising rates far faster than any other major central bank. This means the dollar is now offering a higher return that any other major world currency. So, currency traders have been selling euros, pounds, yen, et al. to buy dollars.  

However, as I’ve been warning for many months, this strong dollar is a mirage.  

The dollar is not outperforming other currencies because of some newfound strength in the U.S. economy. It’s merely the result of the Fed’s policies…or rather its incompetence.  

First, the U.S. central bank somehow missed the growing signs of an inflation crisis last year. Then, when it saw inflation was going to be a problem, it began pushing up rates so far and so fast that it has slammed the prices of virtually very asset class. Stocks, bonds, crypto, real estate…they’ve all been hit. And the U.S. economy has been driven to the point of a deep recession. 

The only positive for American consumers has been the strong dollar. But soon, that too will disappear. 

In November, the dollar suffered its worst single-month loss in over a decade, dropping 5.8% against a basket of major world currencies. That’s a massive move in currency terms. 

The reason? 

The Fed has now signaled its intention to temper the pace of its rate hikes. Currency traders know that this means other currencies will start to catch up with the dollar in terms of their return, so they’ve started selling off dollars.  

They also know that the dollar is fundamentally a weak currency because of Uncle Sam’s excessive debts. The recent collapse of the British pound over a budget proposal that would have loaded the U.K. with even more debt, shows that currency and bond traders are increasingly concerned about sovereign debts.  

At its next meeting, the Fed is expected to raise rates by 0.5 percentage points, down from the 0.75% moves it had been making. I wouldn’t be surprised if it goes with a 0.25% hike.  

Irrespective, November marked the beginning of a long, slow decline in the value of the dollar relative to other currencies. Which means imports will get more expensive in America…and assets priced in foreign currencies, such as those inside the Global Intelligence Portfolio, will have a tailwind. 

*** 

Next up…major metaverse investments. 

Given the negativity surrounding crypto at the moment, you’d be forgiven for thinking that big institutional money had stopped flowing into crypto. 

But that’s not the case. Just this week, Animoca Brands, a well-regarded crypto venture capital fund in Hong Kong, revealed that it is launching a $2 billion fund to invest in metaverse companies. 

The metaverse is going to be an all-encompassing, three-dimensional internet existing all around us. This new version of the internet will be built using crypto technology, and we’ll access it using virtual reality and augmented reality glasses and/or contact lenses.  

Animoca has already been very active this year, making a staggering 66 large-scale investments in the first half of 2022 alone. With the new fund, the pace of these investments is set to increase. 

As I always say, when a technology is truly revolutionary, as crypto is, then builders keep building and investors keep investing…downturn or no. That’s exactly what’s happening, and it’s a sign that those sitting on the sidelines risk missing the greatest wealth creation opportunity since the rise of companies like Amazon, Google, Facebook, and the other internet giants we know today.  

*** 

Finally this week, the dangerous signs emanating from credit cards… 

For banks, credit cards offer big rewards, but also big challenges. The cards are a major money-spinner, given the insane rates of interest that banks can charge.  

However, banks can’t control how much lending they do when it comes to credit cards. Borrowers are pre-approved for cards and then can use their credit at any point they determine down the line.  

This is starting to become an issue for banks in the U.S. because consumers are starting to use their cards more and more. 

U.S. consumer credit-card balances grew 15% in the third quarter, according to the Federal Reserve Bank of New York. That’s the fastest pace in more than 20 years. And the pace could well pick up in Q4. During the fourth quarter of the year, people tend to borrow more to fund Thanksgiving and Christmas celebrations. 

Already, some banks are considering cutting card limits over fears that a considerable proportion of customers may not be able to meet their debt obligations. 

From a broader economic perspective, the increasing use of credit cards means that consumers are struggling more, which is a very negative trend for the economy given the Fed has further, if smaller, interest rate hikes in the works. 

That brings us to the end of this week’s digest. Many thanks for being a subscriber. And if you have any feedback or questions, reach out through the contact form on the Global Intelligence website. 

Enjoy the rest of your Sunday.