What does the US dollar’s sudden about-turn mean for the markets?

We have been watching the US dollar intently on these pages for many months now, and urgently reporting on developments when and if they occur.

Today sees one such dispatch.

Over the past few days the US dollar has done one of its sudden about-turns.

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What had seemed like an upward thrust, threatening to kill the likes of gold and silver stone dead, has suddenly reversed and the run that began in May now seems to be running out of steam.

A weak dollar sent asset prices soaring

In many ways the US dollar is the single most important price in the world. The dollar is, of course, the global reserve currency. Vital commodities from oil to copper to wheat – energy, metal and food, in other words – are traded in US dollars.

It is a determinant of international capital flows: is money flowing from or to the United States?

A strong US dollar is in some ways good for international stability. It is good for America’s reputation. But a weak dollar enables it to print and spend, and boy does America like printing and spending.

When the dollar is weak, asset prices rise – and the world sure does love a bit of asset-price inflation. Borrowing is cheap, house prices go up, stock prices go up, bond prices go up, energy and metal prices go up. The party keeps on rocking.

When the dollar is strong, an international sense of the jitters ensues and the world worries that the asset price inflation party that has been going on since 15 August, 1971, might be coming to an end.

If you like a bit of asset price inflation, the year from April 2020 was one heck of a party – one that few of the revellers will ever forget, despite the amount of cheap money intoxicants that got consumed.

You might have thought that shutting down economies and a global pandemic might be bad for business. But the money printers gave us a year few of us will ever forget. Was there anything that didn’t go up in price? Steel, stocks, crypto, precious metals, energy; heck, even the price of labour went up. Even the cost of houses in now deserted city centres. It was a bonanza time for all. The S&P500 doubled.

I’m not even sure where the biggest party of the lot took place. It might have been lumber, it might have been some stupid cryptocurrency that nobody born before 1993 has ever heard of.

The party comes to a sudden stop

But then in May, the Feds came along and shut down the sound system. Go home, they said, and revellers staggered towards the nightbus with their new found riches. Did they really get rich? Or did stuff just get more expensive? And the value of their money go down?

We wizened observers think it was the latter. There are some that got rich; the clever ones with access to lots of cheap capital. Most think they got rich because their house went up a bit, but really, they just kept up. Those with no capital? They just fell further behind. Wealth inequality just got that bit worse.

Oxfam will print some numbers about it in a year or two. Everyone will get outraged, especially the clever ones with access to cheap capital. And the printing presses will keep on whirring.

But anyway – back to last May. All in all, over the course of the party, the US dollar index fell from 104 in March 2020 to 89 by the beginning of 2021. That’s a decline of around 14% – a lot for a currency.

I’d say, at a guess, financially speaking, the developed world got at least 14% less equal.

Then the US dollar suddenly rallied. Ooops. It got to 93. Party’s over.

No, it isn’t – in April it fell again. The asset price party’s back on. It slid all the way into May, and then we got another rally.

This time the rally had a stronger footing. There’s a double bottom – a really strong base there. This rally could have legs – and it did. We marched straight back to 93.

This could go all the way to the mid-to-high 90s, we felt. The heat came off commodities. The heat came off crypto. The heat never comes off US stocks!

But this week we got a wobble. Looks like we’re headed lower again. The selling pressure on precious metals and crypto in particular has abated. We’re now at 92, and 91 looks a given.

Do we go all the way back to 89?

I’m not so sure. I don’t mean to spoil the party, but this looks more like a pull back in a bull market to me.

I hope it isn’t, of course. I’m revelling in the asset-price party just as much as the rest of you.