When the U.S. Dollar Appreciates

When the U.S. dollar appreciates offshore assets become cheaper and American exports become more expensive for the rest of the world. Vacations in Great Britain will be cheap this summer as the Brexit has driven the British pound to its lowest in three decades. But an overly strong dollar will hurt US exports and US exporters. CNBC says to stop cheering this rally of the dollar as the stock market is likely to reset to a lower level.

As the Brits fled the European Union, so did money from stocks. But after a stomach-curdling free-fall, U.S. equities boomeranged back – a weird financial-markets mulligan. Pundits cheered.

he bottom line is that the fundamentals of the economy and market don’t look good: Whoever you’re listening to – the Federal Reserve, to the Organization for Economic Cooperation and Development, to the International Monetary Fund – hoary heads of the dismal science see deepening malaise worsened by the Brexit, creaky European banks, possible copycat flight from the euro zone – even a slowdown for the U.S.

The U.S. and to an extent the global economic recovery was driven by the U.S. Federal Reserve that essentially printed money to buy government and mortgage debt. That money found its way into risk assets such as stocks, bonds, real estate and commodities. These asset classes all prospered until the Fed stopped its quantitative easing program. Since that time the markets and global have been flat to slightly down. The U.S. dollar has risen based on expectations of higher interest rates and the fact that the U.S.A. has the only healthy large economy on the planet. But when the dollar appreciates in response to these factors it sets off a chain of events that will hurt investments in various asset classes and the U.S. economy.

All about Timing

It was two after home values quit rising that the bottom fell out of the mortgage backed securities market in 2008. It has now been two years since the Fed quit pumping money into the economy. The only asset to reprice during that time has been crude oil. When will the rest follow? When the dollar appreciates the economy and especially risk assets respond. It is simply a matter of when.

USD Pound Parity

The dollar is going up and the pound is falling. The Belfast Telegraph expects that the pound could hit parity with the US dollar for the first time ever.

Mohamed El-Erian, chief economic adviser to European insurance giant Allianz, said the Government must “urgently” draw up a post-Brexit plan including new trade agreements or sterling could fall towards parity with the greenback.

His warnings come after the pound dropped to a fresh 31-year low on Wednesday, to under 1.28 US dollars, although it has since recovered a little to 1.30 dollars.

Mr El-Erian reportedly said: “After the Brexit referendum, the UK has to urgently get its political act together.”

Uncertainty is the main issue with the pound right now. But that would not be so bad if the dollar were not appreciating on its own. So long as the US expansion continues albeit slowly the dollar will go up and other currencies will fall.  Until a glitch occurs in the U.S. economy that the dollar may adjust downward very abruptly.