Earlier this week, a rumor supposedly leaked from a French government representative indicated that President Obama said the current strength of the dollar was problematic. The dollar weakened on the news, which would serve the U.S. Federal Reserve's ability to begin its monetary tightening plans, and that in turn would serve the economy in the long term. The President had to deny ever saying it, given its unpatriotic connotations, but I'm sure many market players still believe he said it and it has impacted the dollar in my view. This morning in Germany, it seems the German Chancellor fired a salvo back onto the currency battlefield. Angela Merkel said a strong euro was not a good thing for nations on the periphery of the eurozone economy. In speaking on the euro and sharing her indicated preference for the current weakness, the dollar recovered some of that previously lost ground and the battle was balanced again in the stealth currency war between trading partners. Though working now into the late Friday afternoon, the dollar is back near where it started the day.
That spike you see in the dollar index coincides perfectly with German Chancellor Angela Merkel's comments Friday morning about the euro. I found it especially curious that this rare statement came just days after a reported similar statement by the President of the United States, only his statement (if he made it) was against the dollar.
Over the years since the financial crisis began, as the United States and Europe worked to repair and to guard their economies, I've noted a stealth war taking place between the two. For instance, when the Fed was looking down the barrel of the gun and taking extraordinary measures to safeguard the American economy, suddenly certain rating agencies downgraded Greece. It was just the right moment to preserve the dollar, demand for treasuries and investment in the U.S. against the seemingly poorer relative options overseas. Greece and its eurozone partners were seemingly about to avoid the catastrophe that followed that downgrade in Europe, but once Greece was downgraded, the rest of the PIGS (Portugal, Ireland, Greece and Spain) began to crumble. Soon thereafter, the European economies were falling apart and the financial crisis and recession gripped the region. And there was a lot of burning of things in Greece, which was later forced to agree to whatever any nation offering assistance demanded of it. Cyprus served as an example of what might happen otherwise.
Today, with the United States, Europe and Japan at varied stages of recovery, with the U.S. well ahead of the other two major economies, the central banks are now in conflict. Europe and Japan have just initiated quantitative easing and other extraordinary measures, while the U.S. concludes its easing stance.
Fear of an American tightening trend, with Fed plans now solidly understood for this year, I believe led the IMF to suggest to the Fed it hold off its rate hikes until 2016. The IMF's logic was that the seemingly teetering U.S. economy, the only notable economy showing good growth until this winter, might be slipping back into recession. Here in my column, I've been suggesting economic slippage would be short-lived from even before the last jobs report started making people think along those lines. My reasoning, despite some poor manufacturing data points and surprisingly soft consumer trends, was that bank lending in the United States was freeing up at just the right time to drive robust economic activity through the second half of the year and in 2016. Most other hopefuls were simply looking for a redrawing of last year's path, when seasonal winter softness was followed by a springtime rebound.
Germany's Merkel suggested it was Portugal and Spain which would benefit most from a soft euro, when in fact it is the major exporter Germany that does. I suspect the Germans are worried that the U.S. dollar might surge next week around the FOMC meeting, especially if the Fed raises interest rates. It may be also that the Germans anticipate Greece could agree to the offers it has thus far rejected and will continue to reject without any change to them. Such a theoretical action is improbable given it would be a political misfire for Syriza that could cost the party its seat atop the Greek government; but it would help the euro versus the dollar (don't bet on it).
It's interesting to see how far the Germans are willing to go to see dollar strength continue. This may explain some of the harsh speak coming out of Europe lately about Greece and its final chance. For these reasons, I suspect the dollar will strengthen anew as we enter the second half of the month and against a midnight hour approach to a potential Grexit. I believe very few expect the Fed to take any action next week, and that may explain the dollar's stubborn hold lower despite all the Greece uproar of late. Still, I also expect Fed-speak to warm up about a soon coming Fed rate hike, and that should spoil the party for investors near term. Things are about to get really interesting folks. Stay tuned for my regular musings on the market.
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