The dollar continues to work its way lower, prompting people to shift more assets into riskier investments such as stocks. This is a trade that could persist for a time, and indeed, the Federal Reserve and the U.S. government are content to let it continue as it buys time for banks to repair their balance sheets and hopefully restores confidence in our economy. The policy isn’t without its risks, however and we ultimately see it ending badly.
The greenback’s slide is a tonic for commodities. Gold has notched even higher highs, for instance, but that’s really just a symptom of the problem. The real danger lies in the escalating costs of basic economic inputs. Most notable of these is crude oil, which topped $79 a barrel Monday.
From a technical perspective, oil prices have broken out of their trading range, which is likely to bring in more buyers for crude. With very little in the way of overhead resistance to keep prices in check, we could well wake up one morning soon to see oil prices once again in triple digits. Even without further increases, prices have moved up far enough so as to act as a governor on economic growth.
Make no mistake, despite the strength in stock prices during the past seven months, the economy is still in no great shakes. Home foreclosures are mounting, prompting the Obama Administration to unveil yet another plan to aid homebuyers who can’t afford their mortgage. The Fed is doing its part, buying up hundreds of billions of dollars worth of mortgage-backed securities from government agencies in an attempt to keep the lid on rates and spur the ailing housing sector. The banks, meanwhile, may be generating trading profits, but they continue to report deteriorating credit conditions and aren’t making new loans.
Economic figures such as industrial production and capacity utilization have come off their lows, but they remain well below where they stood during the last recession—and companies aren’t hiring. Consumer confidence is also far less than one would expect coming out of recession. Likewise, weekly new unemployment insurance claims have been declining but they remain above 500,000. So it’s a virtual certainty that the unemployment rate will continue to rise.
The official stance of governments aboard regarding the U.S. dollar, meanwhile, is moving from one of quiet concern to modest intervention. Brazil, for instance, has stepped in and imposed a 2 percent tax on foreign purchases of stocks and fixed-income investments in the hopes of keeping its currency, the real, from rising against the U.S. dollar. The real had climbed by a third this year, raising the cost of Brazilian exports. Other nations are likely to follow in Brazil’s footsteps, exerting greater control over their currencies. But given the imbalances in our own economy such moves will likely do little to stem the greenback’s relentless slide.