The Quiet Currency War | The Manila Times


THE dollar has now become so strong that the development has found its way to an increasing number of headlines. The trend has been going on for quite a while now but the growing attention doesn’t make the topic any less interesting to deal with. The strength of the dollar will have an impact on American companies as well as on investors’ returns, depending on whether the dollar risk is hedged or not. Sharp swings in exchange rates also have a clear impact on currently high inflation.

The dollar may have skyrocketed when Covid-19 hit the world in the first quarter of 2020, but interest rates fell just as sharply. The US central bank cut the US money market rate to almost zero and injected huge amounts of liquidity into the economy and subsequently the 10-year interest rate fell to around 0.50%. . Now the dollar is rising at the same time as the Fed (Federal Reserve) is raising interest rates very sharply, and the 10 year interest rate is at its highest in years – is the US dollar still a winner whatever happens ?

I think there is a grain of truth in this consideration because the dollar is the only real reserve currency in the world. No other currency comes close to the same status, which will always lead to a natural need for US dollars and the comfort it provides.

However, the strengthening of the dollar linked to the outbreak of the Covid-19 pandemic was a particular event. When a crisis of unknown magnitude erupts, securing liquidity for businesses is absolutely essential in crisis management. Dollar liquidity is of particular importance to many companies as much of the debt is denominated in US dollars, commodity trading in dollars, etc., therefore companies normally accumulate cash in dollars.

I attribute the strengthening of the dollar, which has accelerated markedly lately, mainly to interest rate hikes, a reason that is almost unspectacular. I don’t see geopolitical tensions or other exciting arguments as particularly important right now. When it’s the interest rate in the United States that helps the dollar to rise, in my experience, you have to look at the evolution of the interest rate over 10 years.

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In addition to the concrete increase in interest rates, my assessment is that there is also a hidden agenda in the background. The Fed and the US government have always been great at playing the shadow game of moving the country’s currency in any direction they want, but not officially.

Since the global financial crisis, the G20 (Group of Twenty) countries have called for avoiding so-called currency wars. The weapon of devaluation is no longer used on a large scale but at the moment I claim the opposite is happening.

The Fed and the US Treasury Department could very well have predicted that sharp increases in US interest rates would most likely strengthen the dollar. A strengthened currency is a useful tool in the fight against inflation. At the same time, interest rate hikes themselves should dampen consumption.

In Germany, before the introduction of the Euro, the currency was also allowed to appreciate continuously as it helped to control inflation and overall strengthen the economy of the country. Now the United States is using the same tactic and thereby passing on some of the inflation. This especially applies to economies that do not have currencies strongly correlated to the dollar.

The euro zone is a distinct example and at the same time an easy rival. First, the European Central Bank is toothless and also characterized by catering to all sorts of unhealthy economic interests. This is the case, for example, of the tradition of finding it convenient to let the euro slide when it is opportune for the benefit of French and Spanish exporters. But letting a currency devalue is not the solution and we can now observe how consumers pay for the additional inflation that the weak euro generates.

This silent currency war was clearly won by the United States a long time ago and I believe it will continue for some time to come. This means that the Fed is not done with interest rate hikes yet, and I believe that the US 10-year interest rate will continue to go higher.

This suggests that the dollar will continue to remain very strong for a period to come, but with fluctuations that will occur. I don’t know how long the market situation will last. For years, I’ve believed that the dollar should generally strengthen and I won’t change that view any time soon. I have, however, started to think about factors that could reverse the direction of the dollar – I do think about it occasionally, but reversing the assessment of the direction of the dollar 180 degrees happens to me every year and it is not yet the case, even if time has passed get closer.

Peter Lundgreen is the founding CEO of Lundgreen’s Capital. He is a professional investment adviser with over 30 years of experience and a powerful entrepreneur in investment and finance. Peter is an international columnist and speaker on topics relating to global financial markets.

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