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A Falling Dollar Heightens Financial Risk

Douglas Adams profile picture
Douglas Adams


  • The dollar's market slide finally broke on Friday as a favorable jobs report and broad hints of a one-off repatriation tax windfall sparked profit taking on short positions.
  • A weak dollar means more liquidity sloshing about global markets that is funding the purchase of higher risk assets with greater yield and appreciation potential irrespective of underlying economic fundamentals.
  • Meanwhile, headline inflation across the G-20 rests at an 8-year low, well below inflation targets while the Fed toys with tightening monetary policy.

Economists continue to worry about the growing buildup of financial risk after a decade of extraordinary central bank monetary activity that caused borrowing costs across the global economy to fall to historic levels. The current weakness in the dollar means all the more liquidity is sloshing around in global markets. Investors appear to be sweeping these cheap dollars into a variety of higher risk assets that run the gamut from 100-year Argentinian bonds to newly issued Iraqi and Greek government debt to energy junk bonds to emerging market debt and equity markets — all carrying comparatively outsized yields while potentially exacerbating financial risk. S&P 500 momentum issues like Facebook (FB), Apple (AAPL), Amazon (AMZN), Netflix (NFLX) and Alphabet (GOOG) (GOOGL) have been in double-digit territory for much of the year, driving the S&P 500 up 10% through yesterday’s market close (5 August). Second-quarter corporate earnings, especially those companies selling predominantly into international rather than domestic markets, further boosted S&P performance to date as US exports enjoyed strong tailwinds in world currency markets. Boeing (BA) is up 51% through yesterday’s market close (5 August) which has powered the price-weighted Dow Jones Industrial Averages into record territory. New orders for commercial aircraft soared 131% on the month through the end of June. Caterpillar (CAT) is up 21% on the year as export markets continue to be a boon for overall earnings. US companies selling abroad benefited handsomely from a weakened dollar which lifted both sales and balance sheet revenue (see Figure 1, below).

Figure 1: The US Dollar, the S&P 500, the Euro and the 10-year Treasury Note Year to Date


While the US Dollar Index (DXY) one-day trading range jumped 1.15% on Friday’s above consensus jobs report and the possible inclusion of a one-off tax incentive for companies to repatriate an

This article was written by

Douglas Adams profile picture
Douglas Adams specializes in macro-economic research and turning theory into practical portfolio applications for clients over the past seventeen years. Mr. Adams recently formed Charybdis Investments International based in High Falls, New York where he is the managing director of a fee-only investment advisory practice with clients throughout the United States. As an author, Mr. Adams has commented widely on a diverse array of topics from Brexit to monetary policy to forex to labor productivity and wage growth. He holds an undergraduate degree from the University of California, a master’s degree from the University of Washington and an MBA in finance from Syracuse University.

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