The markets remain buoyant while the dollar index is developing a pullback to the year’s lows as Fed officials continue to calm inflation fears.
The Fed’s Vice-Chairman Richard Clarida reassured that the regulator could overcome the spike in inflation and provide a “soft landing” without breaking economic growth. People with experience in the markets may remember that the Fed said the same things about 15 years ago, intending to cool the housing boom and overheated economy.
Without going into assessments of the correctness of such a policy in the long run, it is worth remembering that those years were accompanied by a strong recovery in stock markets and pressure on the dollar.
The world may now roughly repeat that story when the DXY lost 30% in two years with just minor pullbacks. Building on the past, we should expect pressure on the US currency to develop as long as the Fed focuses on economic growth rather than fighting inflation.
Of course, this is no reason to expect a pullback of the Dollar Index from 100 points (2020 peak) to 70 in the coming months (-20% from current levels). Those would be levels below the historic lows of 2008 when the DXY was as low as 71. It is more reasonable to expect a much softer scenario but with similar trends.
The need for developed countries to continue their soft monetary policy line strengthens demand for emerging market currencies. In particular, the Chinese renminbi this morning rewrote 3-year highs against the dollar, slipping below 6.39. Earlier yesterday, there were reports that the PBC was trying to counter the appreciation of the national currency. All of these are also signs we saw in the 2000s.
An even more significant side effect of easing financial conditions in developed countries is the rise in commodity prices. So it is not surprising that oil prices are already near the highs of the last three years, threatening to break noticeably higher. Between 2002 and 2004, Brent doubled in price, setting new multi-year highs.
Gold has once again surpassed $1900 per ounce. This is close to the 2011 peaks, though still far from last August’s highs of $2075. Between 2002 and 2004, the value of a troy ounce increased by 80%. Both then and now, the trend in gold reversed noticeably earlier than in the dollar.
It is worth remembering that the beginning of the decline cycle of the US currency in 2002 coincided with the reversal to the growth of national stock indices, with S&P 500 growing by 50% with the help of a weakening dollar. The same situation we saw last year.
