Entering text into the input field will update the search result below

The Dollar's Demise Has Been Greatly Exaggerated - Again

May 07, 2018 1:46 PM ETAAPL, BRCD, CAT, NXPI, QCOM, ZTCOF, CYB, FXE, FXY, UUP5 Comments
Douglas Adams profile picture
Douglas Adams


  • The dollar recently posted its fifth consecutive quarterly loss through the end of the 1st quarter.  By mid-April a dollar rally was in full swing.
  • With the dollar rally, capital flows out of the emerging market space wreaked economic havoc on the usual cast of countries.
  • With the rock bottom expectations of the US-China trade talks fully realized, some form of trade tariffs will likely be in place, perhaps in short order.
  • Does the recent dollar rally have legs?

The dollar posted its fifth consecutive quarterly loss through the end of the 1st quarter. Theories abound but evoke little in the way of consensus. Many investors bet long on the dollar in anticipation of repatriated corporate cash hoards washing ashore in the wake of the Tax Cuts and Jobs Act (TCJA) passed by Congress this past December. Apple (AAPL) announced recently that it repatriated the majority of its $269 billion in overseas cash. For the same amount of money, the Apple board could have purchased all the shares of 275 of the companies listed on the S&P 500, according to news reports. Others took a contrarian view given the high level of political uncertainty in Washington from botched US policy initiatives, to the ever-revolving door of senior appointees to the endless litany of scandals and lawsuits that paralyze policy making of the current administration. Still others saw the economic gloom of pending and countervailing tariffs slipping into a bona-fide trade war, sinking markets in its mud-slinging wake. And now with last week's headline PCE number hitting 1.9% on the heels of the Employment Cost Index showing wages and salaries through the end of the 1st quarter at 2.9%, investors are worried that surging inflation this late in the economic cycle will prompt a more aggressive monetary policy stance by the Federal Reserve, choking off further economic growth. The headline wage growth of all nonfarm workers came to 2.56% in April, not much faster than the pace of headline inflation, was welcomed with an expansive sigh of relief.

Figure 1: The Dollar, the Yen and the Euro Indices during the Bush Tariff Regime, January 2002-March 2004


The dollar, indeed, has historically weakened in the face of market disruptions caused by tariff regimes, falling almost 14% during the 15-month Bush tariff regime that spanned March

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.

Analyst’s 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.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Recommended For You

Comments (5)

The US isnt far behind. The FED cant risk increasing interest rates too much further or they could prick the bubbles they reinflated. Once the market figures this out the dollar will have an unprecedented sell off.
Did youh put your money where your mouth is?
Douglas Adams profile picture
The levels of complexity around hiking the federal funds rate continues to grow.

On one level, you have the $1.5 trillion tax cut stimulus whose impact on spending in the greater economy is still being fleshed out. We are seeing a big jump in M&A activity and buyback programs, led by BA, FB, CSX and a plethora of bank stocks with JPM, C comprising about 70% of the category total.

Apple announced a $100 billion share buyback program, the largest ever announced by a US company, according to data from Birinyi Associates. The board also approved a $14.82 billion a year in dividends, or 16% increase in quarterly dividends making it the largest dividend payer, according to S*P Dow Jones. The company bought back $22.8 billion of its own shares in the 1st quarter. AAPL, whose effective tax rate was already below 21% brought home $269 billion in overseas cash under the repatriation clause of TCJA , a sum that could buy all the shares of any one of 275 members of the S&P 500. The company's buyback program now ranks the sixth biggest in US stock market history. APPL is now the biggest dividend payer in the world.

To date, there is little evidence of much of this money trickling down to workers as April's wage growth at 2.56% is still not much higher than headline inflation.

Capital investment did grow through the end of the 1st quarter with gross private investment up just over 7% for the quarter, driven mainly by a 12% increase in tangible facilities. Ominously, residential outlays by home buyers was flat for the quarter, creating a mixed overall assessment of the impact of tax cuts to date.

The $1.3 trillion budget deal hammered out in early February adds about $400 billion above the Budget Control Act (2011) guidelines. The fiscal budget widened to $600 billion as a result, a three-fold increase over the October through March period, according to Treasury data. That pushes the fiscal budget gap to just over $800 billion in the current fiscal year and will push the hole to over $1 trillion by 2020, according to current CBO estimates.

How all this plays out in the economy remains largely unknown, but FOMC estimates on the path of the federal funds rate has not appreciably changed since the March SEP estimates which penciled in three upticks in rates for the year. The second uptick comes in June. A fourth uptick still carries a 50% probability according to CME futures through last Friday's close.

While headline PCE inflation hit 2% in April, the Fed's use of symmetry in determining its inflation target could see the Fed tolerating a higher inflation rate in the short term as the labor market continues to sort out excess slack that has yet to trigger the the Phillip's curve in a meaningful way to date. At 3.9%, the unemployment rate is at its lowest post since April 2000 without triggering inflation levels that historical precedent suggests. In Japan, the unemployment rate tips the lower end of the scale at 2.5% with headline inflation still below 1% for the greater economy through the end of the 1st quarter. In Germany, the unemployment rate is 3.6% while inflation decelerated in April.

The Fed remains behind the 8-ball this late in the business cycle. A turn in economic fortunes at this juncture does not allow for the Fed to employ traditional monetary policy, which would mean asset buying would be back on the table rather quickly in a downturn. Historically, the Fed employs 500 b/p of rate reduction, a level it doesn't have at the moment. This will likely mitigate the Fed toward squeezing in a slow trickle of upticks in the federal funds rate for as long as the economy can handle moving forward.

The economy is still swimming in liquidity according to the Financial Conditions Index put out by the Chicago FRB. It's the demand side of the equation that remains in question. With tariffs likely happening on an array of goods stemming out the US-China as well as US-EU tensions, market uncertainty is likely on a path to new heights. The so-called Powell put remains untested.
Calculus profile picture
Great Britain is now Japan "incapable of raising rates past .5%"

No he's probably right.
Disagree with this article? Submit your own. To report a factual error in this article, . Your feedback matters to us!

Related Stocks

SymbolLast Price% Chg
Apple Inc.
Brocade Communications Systems, Inc.
Caterpillar Inc.
NXP Semiconductors N.V.
QUALCOMM Incorporated

Related Analysis

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.