Watch The Dollar: Key To Future Of Monetary And Fiscal Policy

by: John M. Mason


The US dollar is becoming stronger against most major currencies and it appears this strength will be maintained for the foreseeable future.

If the US dollar does achieve this position in the world, this will force the Federal Reserve and the federal government change their way of thinking about economic policies.

And, if the government changes its way of looking about economic policies, investors and businesses will also have to change how they go about their activities.

The United States dollar is becoming more and more of a focal point in the future of the United States economy and the economic policies of the United States government.

Mike Bird and Ira Iosebashvili write in the Wall Street Journal, "Dollar Parity Is in Sight for Euro."

The quote Citigroup as saying "it had shifted its Euro-dollar forecast '180 degrees.' The bank now predicts the Euro will tumble to 98 U. S. cents in the next six to 12 months. Last week, others joined the bank in predicting parity."

But, there is more to this. Wolfgang Münchau writes in the Financial Times that the upcoming constitutional referendum in Italy will play a major role in the future of the Euro. If the Italians reject Prime Minister Mario Renzi's efforts to reform the Italian law, there will be real questions about Italy's place within the eurozone and this will have significant ramifications about the Euro.

Right now, things do not look good for Mr. Renzi.

Mr. Münchau concludes his opinion piece by writing, "My central expectations, however, remains not a collapse of the EU and the Euro, but a departure of one or more countries, possibly Italy, but not France."

If "one or more countries" leave the EU, the Euro will suffer relative to the US dollar.

Then there is the English situation. It seems as if almost all signs are pointing to a "hard Brexit," that is a costly leaving of the EU.

This will mean an even greater decline in the value of the British pound. On June 23, 2016, just before the Brexit vote, it took $1.4895 to purchase one British pound.

Today the pound is trading just below $1.2500.

A "hard" Brexit will take the value of the pound significantly below this level.

On the other side of the world, there are some analysts who believe that it might take 120 yen to purchase one dollar. In late September 2016, one dollar could be acquired for just over 100 yen, and just before Donald Trump was elected president of the United States, 103 yen could buy a dollar.

Then there is the Chinese yuan. November might be its worst monthly performance in over a year.

On Monday, November 21 2016, it took more than 6.8900 yuan to buy a US dollar.

In late March of this year, the price of one dollar was around 6.4500 and just before the Trump election, the yuan was around 6.7500.

And, the dollar has also strengthened against the currencies of most emerging market countries.

If analysts are correct and the United States dollar continues to strengthen against currencies throughout the world, but especially against the currencies of Europe, England, China, and Japan, this will create a whole new world of policy issues for the United States government.

Right now, the heavy betting is that the Federal Reserve will raise its policy rate in December.

But, the Federal Reserve might be looking to raise rates further in 2017. The rising level of longer-term interest rates in the United States certainly create an environment where the Fed might find it easier to raise its policy rate even further, as officials at the Fed seemed to want to do in 2015 and 2016.

This would only work to further strengthen the value of the dollar in world markets.

And, an even stronger dollar would do some serious harm to United States exports.

Such a scenario, I believe, would force US policymakers to completely reconsider economic policy.

First of all, the Federal Reserve does not include the value of the US dollar in foreign exchange markets as a policy objective. Right now, Congress argues that the mandate that governs US monetary policy only includes watching the unemployment rate and the rate of US inflation. Nothing is said about the value of the US dollar.

Second, the fiscal policy of the US government has generally been directed at achieving short-term results from spending or taxing policies that attempt to spur on economic growth and raise employment levels.

And, these results of these short-run policies have even been brought into question as the consequence of these efforts have produced declines in the growth of labor productivity and in capacity utilization.

These latter results are just the opposite of what is needed to compete in a world where your currency is one of the strongest currencies around.

Furthermore, if the United States faces this dilemma of having such a strong currency, economic thinking is going to have to change. Since the early 1960s, the United States government has implicitly…if not explicitly…produced economic policies that resulted in a substantial decline in the value of the dollar.

If the government cannot rely on a continued weakening of the dollar, then thinking about economic policy is going to have to change.

What happens to the US dollar and how the US government responds to what happens to the US dollar are going to be major issues in the future. Closely watching these events, I believe, will be very important for investors and businesses over the next five years or so. Why don't you watch these events with me.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.