The Week in Review: July 25, 2022
King Dollar
Inflation is a concern, stocks are in a bear market, and economic uncertainty is rising. Yet, the dollar is in an upward spiral, hitting its highest level in nearly 20 years.
The Dollar Index is a measure of the U.S. dollar relative to a basket of foreign currencies. What has been fueling the dollar’s rise?
Let’s review three key drivers.
The Fed has been in beast mode, and U.S. rates are higher than their counterparts in most major economies. Higher rates attract foreign investors looking for higher returns.
The U.S. dollar is the world’s reserve currency. During times of uncertainty, overseas funds may flow into the U.S. due to the relative safety the U.S. offers.
The U.S. economy is viewed as what might be called the best home in a rundown global neighborhood. Global recession worries are more pronounced, as Europe grapples with the fallout from war, and China continues to wrestle with the impact from Covid lockdowns.
But the U.S. isn’t immune to a recession. Job growth has been strong, but layoffs are rising, according to the Dept. of Labor. And the U.S. Leading Economic Index from the Conference Board has fallen for four straight months (through June).
“Amid high inflation and rapidly tightening monetary policy, The Conference Board expects that… a U.S. recession around the end of this year and early next is now likely,” it said on Thursday.
What does a strong dollar mean? There are pluses and minuses. A stronger dollar aids on the inflation front, as it helps reduce import price inflation while making it more difficult for U.S. manufacturers to raise prices amid stiffer competition.
But it can also raise prices for U.S. exporters. Additionally, it creates stiffer headwinds for revenues and profits of U.S. multinationals, as they must translate overseas sales back into a stronger dollar.
Think of it this way. A U.S. tourist benefits when traveling overseas when the dollar is rising, as you get ‘more bang for the buck.’
However, it is the opposite for foreign tourists visiting the U.S. The same holds true when overseas sales from big companies are translated back into dollars.
If you have any questions or concerns, please don’t hesitate to let me know.
Two for the Road
In 2020, the world’s GDP was $88 trillion and in 2021, $94 trillion. According to the latest projections, the IMF expects the global economy to reach nearly $104 trillion in nominal value by the end of 2022. - VisualCapitalist, July 12, 2022
“Last week I found myself wondering why I don’t buy more piñatas, because right now I’d love to beat the holy crap out of something and then sit in the grass and eat candy.” - Susan Blankston
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1. The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
2. The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly. Past performance does not guarantee future results.
3. The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
4. The Global Dow is an unmanaged index composed of stocks of 150 top companies. It cannot be invested into directly. Past performance does not guarantee future results.
5. CME Group front-month contract; Prices can and do vary; past performance does not guarantee future results.
6. CME Group continuous contract; Prices can and do vary; past performance does not guarantee future results.