The dislocations of the world seem to be going home to rest.
And, it seems that much of the impact created by these dislocations translates into a strong movement of money towards the american dollar.
“In a sign of deteriorating sentiment regarding growth prospects, the euro fell nearly 1.4% against the dollar to $1.0243.”
Europe is in a pickle.
The cost of one pound also fell below $1.2000.
And, as of 11:00 a.m. in the United States, the S&P 500 stock index had fallen about 75 points to around 3,750 and the Dow Jones Industrial Average had fallen about 700 points or to around 30,400.
This is the euro’s lowest point since 2002.
Money is flowing into the United States, but not into stocks.
Bitcoin continues to trade for around $19,000 or less.
Europe in trouble
Gas prices rose in Europe, due to the Russian-Ukrainian war, and a gas strike in Norway certainly didn’t help.
But, there are other factors behind the move.
Inflation on the continent has reached a new high for the Eurozone.
In addition, Germany is posting a deficit in its trade balance for the first time in 30 years.
Italy has been facing the worst agricultural problems for many years.
And the debt burden is really weighing on businesses, and it’s not going to get any better if a recession hits the continent soon.
Moreover, the political situation does not seem so stable in Europe.
The Federal Reserve continues to outperform the European Central Bank
As far as central bank policies are concerned, the federal reserve system in the United States seems far ahead of its European counterpart, ahead of the Bank of England and the Bank of Canada, in compliance with a restrictive monetary policy fighting against the ‘inflation.
Although investors seem to think that the Fed will not continue its 75 basis point hike in its key interest rate in June with another 75 basis point hike in July, bets are still on the fact that the rate federal funds will still be close to 3.33% at the start of 2023.
There is no indication that other central banks will match this rate of increase in the next 12 months.
Thus, it seems that the pressure continues for the value of the US dollar to increase in the coming months.
Many investors are still talking about the possibility that the US dollar will reach parity with the euro and with the pound sterling by the end of the year.
This possibility certainly does not seem excluded at the present time.
But the United States faces its own problems in the future.
Will the Federal Reserve create a recession with its “tight” monetary policy?
Will the Federal Reserve create stagflation with its “tight” monetary policy?
What will the Fed do if the stock market crashes?
What will the Fed do if some debt markets break?
Serious concerns are already being expressed about the future of the “blank check” space (SPACs) and other debt sectors that grew very rapidly during the Fed’s bath of liquidity that accompanied the 2020 Fed’s response to the Covid-19 pandemic and subsequent recession.
And the list can go on and on.
As I have written many times, the American economy has suffered many shocks over the past two years, and it has had supply chain problems, it has had employment restructuring and it has been and will continue to be faced with major technological changes.
All these changes have created problems of imbalance and dislocation in the whole economy.
The federal government, as well as the state governments, have also contributed to the economy which is far “out of sync”.
Focus on the dollar
I focus on the value of the dollar because of its central position in this whole complex of markets and industries.
The value of the US dollar establishes a link between what is happening in the United States and what is happening in the rest of the world.
In that sense, it’s a very, very important variable to monitor.
When the dollar is doing things the way it is doing now, you have to stop and think about why the dollar is behaving the way it is.
The value of the dollar dropping from $1.1400 at the start of this year to below $1.0300 is significant.
Something is happening.
In today’s world there’s a lot going on and it’s not very pretty.
So. catch up with the dollar. Learn from dollar movements.
If the value of the dollar falls to parity with the euro and the pound sterling, what does this mean for the American stock market, for the American economy, for the euro zone and for England?
There’s a lot going on.