Amid renewed inflation worries and above-average economic growth.
By Wolf Richter for WOLF STREET.
The Dollar Index [DXY] which tracks the USD against a basket of six currencies (euro, yen, Canadian dollar, British pound, Swedish krona, and Swiss franc) dominated by the euro and the yen, rose to 107.6 at the moment, the highest level in two years.
Over the past two months since the Fed started to furiously backpedal on the pace of its rate cuts, it has risen by 7.3%:
The US dollar has been on a rampage against other currencies since late September when the Fed, after its monster rate cut on September 18, started talking of smaller and fewer rate cuts to end at a higher level than previously priced in, after it became clear that the US labor market was growing solidly after all, that inflation was showing early signs of re-accelerating, that economic growth continued to run well above the 15-year average, powered largely by consumers, who in recent years got big increases in incomes and saved a bunch too, while their piles of interest-earning cash have ballooned, which they could spend in the future.
And this occurred while other central banks – in our case here, the ECB, the Bank of Japan, and the Bank of Canada – have out-dove’d the Fed by far:
- The Fed has cut by 75 basis points, to 4.75% at the top of its policy rates.
- The ECB has cut by 100 basis points to 3.4% and has indicated that it will continue to cut despite stubbornly high services inflation and surging wages.
- The Bank of Canada has cut by 125 basis points to 3.75% and has indicated that it will keep cutting.
- The Bank of Japan hiked by two minuscule notches, from negative to +0.25%, despite inflation rates that are similar to those in the US, leaving real yields of government securities deeply negative. It said it may hike again after wussing out before.
The ECB’s and BOC’s cuts have widened the spread between their policy rates and the Fed’s policy rates. And the spread is now expected to widen further.
The much higher yields of USD-denominated securities, such as Treasury securities, make them a juicy target for foreign investors, and they’ve backed up their trucks and are loading up. This demand for USD-denominated securities and the higher yields expected for them in the future is very supportive of USD exchange rates.
The 10-year yields for government securities makes that clear:
- US: 4.41%
- Canada: 3.46%
- Germany: 2.25%
- Japan: 1.08%.
The euro has dropped by 7.0% against the USD since late September, trading today at $1.042, the lowest since November 2022.
The Euro Area economy is growing slowly, with growth stalling in some countries. Germany has been wobbling quarter to quarter between slight growth and slight decline for the past two years. GDP for the year of 2023 dipped a tad, and 2024 looks similar so far. Despite fears about core inflation, and especially stubbornly high services inflation, the ECB has said it will keep cutting. And the euro dives:
The Canadian dollar has been wobbling lower all year against the USD as the BOC has been focused on cutting rates. Economic growth slowed sharply in 2023. Over the past seven quarters, the economy booked two negative quarters and one near-flat quarter. The rest showed modest growth. Over the first half this year, GDP growth picked up a little. Q3 GDP has not been released yet.
By the end of last week, the CAD had dropped to 0.709 USD, the lowest since June 2020. It currently trades up a little from there, at 0.715 USD. Since late September it has dropped 3.7%. Since mid-January, it has dropped by 5.5%.
The BOJ is in a category of its own, crushing its currency. Inflation in Japan is running at similar rates as in the US. But the BOJ has vowed to do the absolute minimum as late as possible, too little too late being already too much too fast. Earlier this year it finally ended QE and a few months ago started QT, trimming its gigantic balance sheet in baby steps. This attitude of “too little too late being already too much too fast” has been going on for two years, and as a result the yen has gotten slaughtered.
The yen currently trades at 154.7 yen to the USD, on its way back to the levels of July when it had plunged to 161.5 to the USD.
Rather than changing monetary policies to prevent the wholesale slaughter of the currency, authorities have been trying to jawbone markets, and that’s essentially useless except for day-traders. And authorities have periodically been blowing tens of billions of dollars to buy yen, but those massively costly efforts to prop up the yen were only briefly effective, before the yen re-plunged, as we can see in the chart.
Since the Fed started talking about hiking rates in September 2021, the yen has plunged by 30% against the USD.
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No chart for the Swiss Franc or the Swedish Krona? ?
I don’t have a scintilla of interest in them. But I was thinking of putting up a chart of the USD/MXN since the US and Mexico are joined at the hip economically. But the Bank of Mexico never did QE and its interest rate is STILL 10.25% after four cuts. It’s doing something right!
When I look at a chart of the peso against the USD, it has still declined quite a lot over the past year in spite of those high interest rates. Why?
Thanks Wolf as a Canadian any predictions for 2025 for $CAD? Seems the resource based currencies held up better than certain other ones ie. CAD/AUD vs. EURO. I remember Soros had a trade in the old days long commodity currencies short others?
67.86 U.S.
It is wonderful to see the US Dollar doing so superbly against most all of the other currencies in the world.
Higher interest rates in the US across all rate groupings is excellent news for the strength of the US Dollar.
Yes, we are all going to be rich here in the good old USA!
MSN: ‘I have no money’: Thousands of Americans see their savings vanish in Synapse fintech crisis
The crisis started in May when a dispute between Synapse and Evolve Bank over customer balances boiled over and the fintech middleman turned off access to a key system used to process transactions. Synapse helped fintech startups like Yotta and Juno, which are not banks, offer checking accounts and debit cards by hooking them up with small lenders like Evolve.
In the immediate aftermath of Synapse’s bankruptcy, which happened after an exodus of its fintech clients, a court-appointed trustee found that up to $96 million of customer funds was missing.
1:04 PM 11/22/2024
Dow closes at record high, S&P 500 scores weekly gain ahead of Thanksgiving
Dow 44,296.51 426.16 0.97%
S&P 500 5,969.34 20.63 0.35%
Nasdaq 19,003.65 31.23 0.16%
VIX 15.37 -1.50 -8.89%
Gold 2,707.70 32.80 1.23%
Oil 71.15 1.05 1.50%
MW: 2-year US Treasury yield (interest rate) has 8th straight week of gains on improved US outlook
Here is the thing….., the Euro Zone and UK, actually been experiencing low to slow growth for the last couple of years, and the US has Not…. (Strong Growth ), So why in the Hell would the FED Reserve want to lower Rates at the same Pace and time as the Euro Zone and UK ??????? Now as expected the Federal Reserve is learning the Hard Way…….
Even with that both Euro Zone and UK are struggling with Higher Inflation to Accelerate right now….,
Monetary policy is not via interest rates. Its transmission mechanism is bank reserves.
Last chart, ouch.
Plus Trump Tariffs.
Japan is going to have some fun inflation to deal with.
So what to buy? More BTFD of US indices?
It’s all good until the US can’t print enough money to pay 4.41% on its ever-accumulating trillion-dollar debt. If the dollar begins diving, then the other currencies will likely tank alongside. So where would you go?
The US Treasury does not and cannot print any money to pay interest on its $36+ trillion federal debt.
US will also have to soon join the rest of developed world in interest rate suppression. The Fed’s bravado of 2% target will become an embarrassment if Treasury market operations are affected.
Liquidity is trying to find a home and may likely realize that central bankers have no choice but to inflate away.
Deflation (2008) leads to money creation (2008-2022) which finally leads to inflation. Long and variable lags. Deflation is often the mother of inflation
The problem is collectively (all investors) we can’t go anywhere. So people are making best guesses on what the right hedge is from Bitcoin, to gold to equities.
But history shows that all of this is futile. If shit does hit the fan only highly indebted people benefit. Everyone else is hurt one way or the other.
But of course I am not predicting doomsday. This will resolve one way or the other in a less violent way IMO
Higher dollar vs. trade tariffs will be an interesting show. Will more valuable dollars continue to buy imported goods even with tariffs attached to them?
What most Americans don’t understand about tariffs is take for instance Toyota to get around tariffs they build manufacturing here and then no tariffs issues. But if we want to sell fords in china we have to pay 200 percent tariffs.
Looks like they are doing a great job of devaluing their currency in anticipation of tariffs.
HAHA! Clever!
[1W] the DJI and BTCUSD closed at a new all time high in front of Fed
minute next Tuesday on Nov 26.
Action of gold relative to all of those currencies is quite telling.
There are rumours of a Canadian loonie worth 50 cents to the USD.
The problem is that rental investment companies tend to seek their returns in USD, while Canadians will be paid in theoretical 50 cent Loonies.
Anything to keep the housing bubble going.
above avg. econ. growth = debt fueled inflationary growth
1/1/2020 1715.2
9/1/2021 4193.2
2/1/2023 3021.8
2/1/2024 3567.7
9/1/2024 3236.8
The drop in reserves since 2/1/2024 has propelled the dollar higher.
This should make imports cheaper and exports more expensive unless I got that backwards like I have in the past. Not clear what overall impact this will have on interest rates or rate cuts here. I struggle to comprehend all the real implications in these situations.
Is it even possible for asset prices to decline? Or is the fix in?
It is always very possible for any and all asset prices to drop to zero or below.
i don’t think so. enough people believe that the fed is there to save the day that the prices never drop that much before buyers rush in to btfd.