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Where Will Dollar Head Once Fed Hikes Rates?

Where Will Dollar Head Once Fed Hikes Rates?
(Dollar Photo Club)

Wednesday, 11 November 2015 10:44 AM Current | Bio | Archive

Nobody knows how much upward potential the dollar has once the Federal Reserve begins raising interest rates.

Meanwhile, China released important economic data, which were all weak again, especially when we take a longer-term view:
  • Industrial production rose by 5.6 percent year-on-year (y/y) in October, which was its lowest growth rate since 2009 when the world still experienced the Global Financial Crisis and after China had injected in November 2008 a stimulus package of about 4 trillion yuan, which was about $570 billion at that time, in its economy.
  • Fixed investment rose by 10.2 percent, in line with the consensus forecast, but coming in at its lowest growth rate level since 2001.
  • Retail sales rose 11 percent y/y, which confirmed the declining growth trend that is in place since November 2011 when retail sales performed at a growth rate of 19.9 percent y/y.
As global growth depends for a huge part on China’s economic growth path, which still lacks those real green shoots, it should not come as a surprise the OECD global GDP growth projections show the world is expected to continue growing at “below the historical average of 4 percent” well into and possibly beyond 2017.

In context of long-term investing, it is advisable to keep an eye on how the price of copper evolves because copper is historically known for signaling turning points in the global economy.

Copper has applications in most sectors of the global economy that range from homes to factories, to electronics and power generation as well as power transmission, and therefore copper is rightfully considered as a reliable leading indicator of global economic health.

However, copper prices are at lows we haven’t seen before this century.

Axel Weber, chairman of the Swiss bank UBS, and ex-president of the German Bundesbank as well as the ECB, gave an interesting interview to the Wall Street Journal.

Here are some key points:
  • For the Fed, the data are much more clear as there are very high job numbers that are picking up and because of that, there is pressure in the labor market emerging. Weber thinks the Fed will most likely react with a rate hike and that will have implications for the rest of the world as there will be no longer an interest rate distribution with similar outcomes to both sides. Rates in the U.S. have reached a bottom and will likely go up from here on and that will determine the course for the rest of the world.
  • At this moment, the only place where we have seen movements so far are the foreign exchange rates that have started moving in different directions that reflect the fundamental strengths of the different economies. The U.S, is likely to face pressure on the dollar across the board, but in particular against currencies that will still be easing, of which there is the euro and the Japanese yen, but Weber also counts the Chinese yuan into the same group. A rising dollar will impact the U.S. economy, but we should not overlook the fact the U.S. is not an export driven economy as exports represent only about 14 percent of the total economy.
  • The actual some kind of “dogmatic” inflation targeting at 2 percent in a low growth environment is counter-productive and the economies should be better served aiming at 2 percent inflation targets over the longer term.
  • At the moment, we see structural problems in our economies. We are not facing cyclical weaknesses alone, but we have structural problems especially within the labor markets and if you use cyclical policies like monetary or fiscal policies rather than structural reform policies you create a situation whereby central banks and policy makers continue to do “more of the same” overlooking the fact cyclical policies are useful in recessions, but cannot resolve structural problems in economies.
  • The fundamentals of the U.S. economy will justify breaking the parity level between euro and dollar.
Equities in Europe, and to a smaller extent Japan (because of further easing by the ECB and the BOJ), are set to climb from their current levels.

Because further weakness of the euro and the Japanese is to be expected, gains in these markets should always be hedged against euro and yen volatility. Investors in 2012-2013 who had deep faith in Japanese equities lost practically all because of the plunging yen.

All this is very important for dollar-based investors as literally nobody knows how much upward potential the U.S. currency has once the Fed will start normalizing.

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Nobody knows how much upward potential the dollar has once the Federal Reserve begins raising interest rates.
china, investor, dollar, economy
Wednesday, 11 November 2015 10:44 AM
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