The Strength Of The U.S. Dollar: Depends Upon Europe And Japan

|
Includes: BIL, DFVL, DFVS, DLBL, DLBS, DTUL, DTUS, DTYL, DTYS, EDV, EGF, FIBR, FTT, GBIL, GOVT, GSY, HYDD, IEF, IEI, ITE, PLW, PST, RINF, RISE, SCHO, SCHR, SHV, SHY, SST, TAPR, TBF, TBT, TBX, TBZ, TLH, TLO, TLT, TMF, TMV, TTT, TUZ, TYBS, TYD, TYNS, TYO, UBT, UDN, USDU, UST, UUP, VGIT, VGLT, VGSH, VUSTX, ZROZ
by: John M. Mason

Summary

Although the US dollar has weakened in recent weeks, the longer-term value of the dollar is going to depend more on the weaknesses in other countries, not US economic polities.

Europe and Japan still face massive needs for structural changes to their economies, changes that are not being made, changes that their people are very reluctant to make.

If the Trump administration fights against this strong dollar, unintended consequences will arise creating possibilities for investment opportunities not unlike those created during periods of quantitative easing.

The future value of the US dollar may depend more upon the weaknesses found elsewhere in the world than what will take place in the United States, itself.

In particular, there is the underlying weakness in the economic structure of Europe and Japan.

For years and years, the European Union has responded to financial and economic problems by coming up with the minimum, short-run solution to situations…commonly referred to as "kicking the can down the road"…without really dealing with the underlying, fundamental issues that must be resolved before the eurozone can be fully competitive into today's world.

Now, it seems that Europe is heading towards another major crisis. The specifics of this crisis seem to be connected to the looming debt situation in Italy and Greece.

But, there is also structural bank problems, and labor problems, and government problems, and educational problems, and so on….

There is a great reluctance to change built up within these countries, a reluctance that refuses to move even though things get worse…and, worse…and worse. Even the relatively moderate efforts of former Prime Minister Matteo Renzi could not move Italy to accept structural reforms to the country and eventually led to his resignation.

The situation extends to other members of the EU, even though they do not seem to be in as eminent danger as are Italy and Greece. But, France, Spain, and some others cannot be excluded from the list of member countries that will not introduce the changes that are needed to make the union more competitive in the world.

And, they absolutely refuse to consider one of the major requirements of making an economic union work…a political union. Although almost everyone involved claims that at some point in time, the European Union must form a political union if the economic union is to survive, no one really wants to take the lead in such an effort.

Mohamed El-Erin, the chief economic advisor to Allianz, writes something similar in the Financial Times, but only talks about the need for the faster cyclical economic recovery of Europe and Japan: he argues that their economic recovery needs to "develop deeper, structural roots."

Japan must also deal with structural reforms that need to be incorporated within its economy. But, even though Prime Minister Abe has made some attempts here and there to restructure the Japanese economy and political environment, not nearly enough has been done to resolve the issues facing the country.

The weaknesses in these geographic areas will continue to dominate their economic performance over time and this will mean that their currencies will continue to remain weak relative to the US dollar.

There are other factors that may impact the relationship between the currencies such as increases in interest rates by the Federal Reserve, the future of US fiscal policy as yet not introduced by President Trump, and whether or not the US moves to a more protectionist position in world trade. But, as Mr. El-Erin mentions, these are but short-term factors.

The primary long-run factor that must be considered is the willingness of Europe and Japan to restructure their economies and their governments to make their countries more competitive within world markets.

Furthermore, in the case of the EU, some form of political union must eventually be achieved.

Until these things happen, the value of the US dollar will continue to trend upward relative to the Euro and to the Yen.

Europe and Japan must not look elsewhere for the solution to their problems, they must look internally. And, until they do something about their structural issues, they will continue to remain weak economically, which will be accompanied by a weak currency.

This means that President Trump will have to accept a stronger dollar in his efforts to build a workable economic policy for the United States.

If he does not accept this reality in constructing an economic policy, then the policy will be flawed from the start. And, a flawed policy creates investment opportunities.

Just as three rounds of quantitative easing on the part of the Federal Reserve System during the current economic recovery produced historically low interest rates and investment opportunities that many sophisticated investors took advantage of, fiscal policies can also create "unintended consequences" that smart investors can use to their own benefit. We will talk about these possibilities in future posts.

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.

About this article:

Expand
Author payment: $35 + $0.01/page view. Authors of PRO articles receive a minimum guaranteed payment of $150-500. Become a contributor »
Tagged: , , Market News Article
Problem with this article? Please tell us. Disagree with this article? .