[teddy bear]

Well, it's not crypto related, but couldn't think of a better section to ask this question.

As I got some money saved in USD I actually took an over 1,000$ blow with huge price drop this year compared to the price in October. Not to even mention to the price in February last year - damn, that was one strong dollar.

From what I read on the web it's supposed to start increasing soon, but I don't have any financial background and I actually just recently started digging into cryptocurrencies, so my knowledge is a little bit limited in this area.

Do you guys have any idea why it started dropping that much lately and whether it should increase or will it keep falling? I'm pretty sure it will increase, but then again.. I don't really know much

After all I'm a broke college-boy and 1k gives me a month of fun in The Philippines or Thailand (on budget), so..

Thanks

[Orson]

Thank you for opening up this topic, because I, too, am rather mystified.

First, to your framing query:

Quote:

From what I read on the web it's supposed to start increasing soon, but...[what's next?]

Do you guys have any idea why it started dropping that much lately and whether it should increase or will it keep falling?

The first remark comports with my understanding. But adding to my mystification has been the growing strength of the Eurozone in the face of so much negative structural overhang (eg, Brexit, Italy's massive non-performing loans - by comparison the Greek problem that caused much of the Euro crisis is almost nothing; and the growing imported unemployable welfare class of immigrants).

The second question about recent dollar weakness in 2017, especially the second half, could all be down to interest rate confusion from the mismatch of Obama's Fed team versus the emergent Trump team and business policy.

To put the issue baldly, why dollar weakness in the face of strengthening US GDP?

The Fed began raising interest rates before Trump's election (if I recall correctly), yet only managed to raise rates the minimal 0.25% once or twice a year. This unexpected timidity seemed to confirm GDP weakness instead of expected strength.

Here was the view over two years ago, in the Fall of 2015:

Quote:

This is the chart that shows FOMC participants’ views of the appropriate target federal funds rate by the end of each year for 2015 through 2018 and also over the longer run. Each participant’s fed funds rate forecast is shown as a distinct dot at each of these time horizons.

Let us focus for a moment on the median policy projection, highlighted with a red dot, for the end of 2015: Most of my colleagues think that it will be appropriate to raise the target federal funds rate sometime this year. Over the next three years, these projections envision a slow increase in the rate, to about 3-1/2 percent by the end of 2018.[13] On average, this path is consistent with the target federal funds rate increasing by 25 basis points at every other FOMC meeting over the next three years. This is certainly a gradual path by historical standards....

https://www.streetinsider.com/ETFs/Feds+...66326.html

The trouble has been that rate rises have lagged real interest rate costs (ie, Interest - Rate of Inflation).

Thus, holding dollars has been a net cost. Given the rival opportunities (eg, a resurgence in emerging markets), this real cost is even higher, and therefore the dollar has fallen as the holders of Treasuries have dumped dollar-denominated assets.

And that's what we see here:


Can you say the expert Fed bankers have not adjusted interest rates fast enough? Probably.



SOURCE, further discussion plus some (possibly wild) speculation at Zerohedge: https://www.zerohedge.com/news/2018-01-1...means-gold

In doing my own research, I was curious about what the economist might have to say. Based on this link: http://www.economist.com/topics/dollar

not much!

So. Will US growth in 2018 result in a rising dollar sooner or later? Beats me!

The starting point of the Zerohedge piece is the inversion of fundamental expectations. IS that what's going on here? Or will there be a reckoning? Will US GDP performance crush this inversion at some point? And how can one tell that it's coming?

This is the conundrum involved in the multiple QEs witnessed since the Great Recession of 2008 - treating the problem with unprecedented measures and 'normalizing' rates after the emergency ended.

Can we crowd source some wisdom? I hope others share their insights, too.

[Orson]

Bank of American claims to have an insight re(?)solving the conundrum. The Euro-USD is following future interest-rate expectations, especially as seen by QE-Euro watchers of the ECB and it's president Mario Draghe because of QE in the Eurozone.

Let's see if this makes sense. To restate the problem (liberally relying on the account from Zerohedge, because that's all I can muster at the moment):

Quote:

In recent months there has been a lot of confusion, and loud gnashing of teeth, among the FX trader and analyst community, which has been unable to make sense of the confounding divergence in real spot rate differentials charts between the EUR and USD, whether on the short or long end.

Making matters more confusing has been the sharp jump in the EURUSD in recent weeks, a paradox in light of the progressively improving US economic data.

And so, traditionally used to trade on correlation pairs, the forex community set forth to find a new, improved, and more accurate correlation between the EURUSD and... well, anything. Today, Bank of America appears to have stumbled on the answer in the form of the EURUSD vs. relative forward interest rate expectations, and specifically the EUR-USD 2y2y-2y forward spread differential.

The reason why this particular forward rate differential is best suited to capture the fate of the EURUSD is that it looks not at the current pricing of real rates, but future central bank interest rate expectations, especially those of the ECB and BOJ which over the coming year are increasingly expected to slam the brakes on both QE and NIRP.

Here is how Bank of America's FX research team lays out the background:

Quote:

Pressure on the dollar has intensified in the opening weeks of the year despite a supportive macro backdrop. US data had had a strong run, fiscal stimulus is expected to provide further tailwinds to the already-solid growth outlook this year and the Fed continues to tighten.... As we have argued before, the USD traditionally benefits from first-mover advantage as the Fed leads other central banks into a global tightening cycle. That was the primary driver of dollar appreciation in 2014-15. However, as other G10 central banks follow the Fed's lead, the USD has been faltering despite ongoing tightening. This is because interest-rate expectations outside of the US have undergone a profound shift. With respect to EURUSD specifically, relative forward interest-rate spreads explain the sustained rise in the exchange rate since early 2017, though upside looks limited for now.
_ _ _
Clearly on a backtest, the 2y2y-2y forward spread captures the EURUSD moves far more accurately than a simple real spot delta (as seen up top). In other words, instead of using spot rate differentials, the proper metrics is a "forward" based framework for exchange rates.

Here Bank of America explains why spot rate differentials no longer work:

Quote:

The fundamental link between global central bank repricing and USD-based exchange rates (emphasis: EURUSD) cannot be seen through the traditional lens of spot interest rate differentials, which have broadly continued to move in a direction favorable for the dollar. Indeed, the US two-year swap rate has risen a full 65bp from levels prevailing in early September (for reference, only the CAD 2y rate rose by more).

Instead, the FX strategists caution that "FX markets are in a regime defined by interest rate expectations."[/b]

https://www.zerohedge.com/news/2018-01-1...e-eurusd-0

Apparently, another report is coming to further clarify resolving this tension defined as future expectations versus unfolding present-day reality. The hint at Zerohedge is that eventualities favor long-USD.

A further COMMENT by mkkby stizazz emphasizes my previous post's point and adds another historical point about rate-rachet patterns:

Quote:

The fed is WAY BEHIND THE CURVE of bond market movement. In the past this usually meant larger rate hikes or "surprise" off meeting hikes.

Don't be surprised if the fed starts raising rates 1/2 or 3/4 points at a time. It's happened many times before. The economy is strong. Markets are in bubbles....

MY APOLOGIES FOR THE LACK OF CHARTS; MINE ARE NOT CURRENTLY DISPLAYING and so I've depended on text instead.

[Robert High Hawk]

USD / EUR was at historical lows, approaching parity a couple years ago. Now it's like it was before. And I suspect eur will get stronger. This is because US debt is getting insane as well as any semblance of fiscal responsibility. Eurozone is not much better, but it is. Also king dollars status as reserve currency is under serious pressure.

[djk100]

There is stronger economic growth expectation in Europe and Japan than there was a year ago.

[Orson]

(01-20-2018 11:34 AM)Robert High Hawk Wrote:  

USD / EUR was at historical lows, approaching parity a couple years ago. Now it's like it was before. And I suspect eur will get stronger. This is because US debt is getting insane as well as any semblance of fiscal responsibility. Eurozone is not much better, but it is. Also king dollars status as reserve currency is under serious pressure.

Actually, given the Trump market boom, "insane" unfunded debt obligations in the US - mostly of the state employee benefits, i.e., unions - is looking to become less, especially if 4% GDP is achieved.

And the "Eurozone...is (doing) better?" I think it depends on how you count and what you count, over time.

For example, take the bankrupt overhang of non-performing loans in Italy, which is many time whats caused (in part) the US' Great Recession:

Quote:

...[T]here’s a huge risk that what little confidence remains in Italy’s banking system could crumble, especially given the sheer scale of the rot....[A]lmost all of Italy’s largest banking groups, with the exception of Unicredit, Intesa Sao Paolo and the investment bank Mediobanca, have Texas Ratios well in excess of 100%, meaning that the total value of their non-performing loans is greater than their tangible book value plus reserves. Banks tend to fail when the ratio surpasses 100%. In Italy there are 114 of them. Of them, 24 have ratios of over 200%.
https://wolfstreet.com/2017/11/16/sharp-...ing-banks/

And other fundamentals will not bail out Italy from bankruptcy, like Trump's stock market boom is doing for the US:

[T]he only long-term solution to this sort of ingrained dysfunction is to grow out of the problem by making healthy loans over a decade of time. But that is now flat out impossible. Banks make money on the spread between the cost of their funds and the cost of their loans, and most loans are taken out by people under 40 — such young people are the source of most of the car loans, house loans, and college loans that drive a modern economy. Europe is at negative interest rates and Europe faces demographic collapse. That’s less income per loan on a smaller volume of potential loans.
http://zeihan.com/europes-next-crisis/

And thus we are back to Bank of America's theory on future EUR/USD trading...to retracement ahead?

[ProGambler]

Confidence in EZ is high atm. I believe it is misplaced on the back of the ECB printing tens of billions.

[Robert High Hawk]

@ Orson,

That is a very good point about some countries in the EuroZone. I think you can write off much of southern Europe. I suppose I was thinking of Germany when I wrote that comment.

That said, US debt is simply intractable. With the wildest GDP growth you can imagine of 4%, the entitlements baked in the cake such as Social Security, Medicaid/Medicare etc are just not sustainable. Through in the military spending and it's all over- a growing debt that will never be paid off.

https://www.zerohedge.com/news/2018-01-2...-care-less

Normally not a huge deal, as long as people want the dollar. That is the competitive advantage the US has had since 1950. The Euro never had that, but people don't expect it too. Here's where I see the big change that will hurt the dollar:

China. They are already putting significant deals in place to cut out the USD for bilateral trade agreements. I think they are trying to back it up with gold since they launched a yuan based gold exchange in Hong Kong. The deal they cut with Russia this was was pretty huge. Then Iran. Now Pakistan. If Saudi Arabia cuts a deal with China this way, USD. Is going to have big problems. China also recently stated, then quickly retracted, that they would back off buying US treasuries. Many say this feint was deliberate to test the reaction.

So from an existential point of view, USD is simply facing pressure that the Euro isn't. Ironically it will be increasingly more expensive to project US political power abroad via the military that is the foundation for much of the dollar trade.

I'm not deeply attached to any of the above opinions so definitely welcome debate on the matter. That's just my big big long term observations.

[Akwesi]

It's worth pointing out that Trump's said he wants a weak dollar. Obviously, Trump is not the Fed, but this should still have some effect on long-term prospects.

[Ethan Hunt]

(01-22-2018 02:31 PM)Akwesi Wrote:  

It's worth pointing out that Trump's said he wants a weak dollar. Obviously, Trump is not the Fed, but this should still have some effect on long-term prospects.

This makes sense. A very strong dollar make exports very expensive for everyone else and reduce the number of exports. Whereas a weaker dollar will increase exports and in either situation domestically $1 will buy the same. A weaker dollar is actually a benefit for a while.

[Hell_Is_Like_Newark]

China has been tightening capital controls to stem the $billions leaving China. A good portion of that money was ending up in the USA, which then drives up demand for dollars.

https://www.bloomberg.com/view/articles/...s-now-what

[The Beast1]

A weaker dollar is a good thing. It helps exports and increases American competitiveness in the global marketplace.

HISLN got it down. China's tightening their grip on capital controls which will reduce the demand on dollars as chinese investors can't launder their yuan in US markets.

[justforfun19713]

(01-22-2018 02:31 PM)Akwesi Wrote:  

It's worth pointing out that Trump's said he wants a weak dollar. Obviously, Trump is not the Fed, but this should still have some effect on long-term prospects.

Modern economic theory (most of which I believe to be complete BS... I prefer the Austrian School, myself) 'A weak currency allows one to inflate your way out of debt.' In other words, yesterday's debt is paid for using cheaper (less valuable) fiat.

While a weaker dollar is good for trade, it kicks the debt problem down the road. At some point we are forced to use wheelbarrows of currency to pay for things, a la Nigeria.

'Money is the bubble that never pops.' - Naval Ravikant

Well, the US currency bubble is approaching the bursting point.