Eoin Treacy's view -
One point: I hear from various parts /commentators and sometimes you also comment about the strength or weakness of USD
Why is it that people see rising inflation in the US and - consequently - potential rate hikes as USD bullish? Every time any news hints to potential rising inflation (like the wage growth number on Friday) the crowd jumps in and buy the USD for a couple for days (and sell gold like last Friday).
Inflation is - if anything - eroding the purchasing power of the USD. I don’t get how this can be USD bullish.
Not even the rate hikes by the FED to counter inflation are bullish. If you look back, the USD has stopped rising vs EUR when the FED has started hiking in Dec 2015. And when the hikes accelerated in 2017 the USD tumbled.
On the opposite, countries fighting against deflation / or low inflation and low or negative interest rates like JPY or CHF, have positive trends.
To me all this bullishness on the USD on rising wage numbers (hence inflation fears) look strange. I don’t believe it lasts beyond the short-term reaction of a couple of days (interesting: helped by the sell-off of risky assets USD was down big vs JPY today on Feb 5).
P.S. one point I also hear over and over from commentators is that the interest rate differential is in USD favor and that is USD bullish.
So what: if you are a EUR or JPY investor, the forward premium that you pay on a ccy hedge wipes out your entire interest rate differential and more if you include broker spreads
Thank you for this insightful email which raises a number of points which I hope I can do justice to. There are two points that we need to address. The first is of the dollar, or indeed any fiat currency, as a store of value, then the individual merits of fiat currencies which are necessarily ratios because one cannot buy one without selling another.
Gold is hands down the best monetary asset for holdings its purchasing power since an ounce of gold today can buy pretty much the same quantity of goods it could 50, or even 100 years ago. If one takes that long-term perspective then fiat currencies cannot compete. As with any currency, relative values fluctuate so, we get medium-term and even secular trends.
However, if we look purely within the foreign exchange field, trends seldom last more than a few years. David has long said “no country wants to have a strong currency, while some need a weak currency more than others”. If we apply that logic to the US Dollar and its relationship to other fiat currencies perhaps we have something to base our rationale for looking at the market on.
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