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Why the dollar matters

|Includes: Dynex Capital Inc. (DX), IWM, SPY

It never fails that from time to time I get asked why the dollar matters.  Isn't it what the Fed does that matters?  Part of my answer is embedded in their question:  Usually the Fed has the funds rate at a value other than zero and can manipulate that up or down, but in our current climate the Fed has rebalanced its own spreadsheet.  In addition to taking these steps to provide liquidity, we all now know that the Fed has gone much further printing money and purchasing preferred shares of our companies, MBS, and other securities.  Let's not forget the government's direct involvement in restructuring companies even.  So back to the original question, when all of the usual mechanisms are spent, used up, where to we go from there?  Since deficits are how our government and others are stimulating the economy, it becomes all the more important how well structuring the financing projects are going as well as how much capital is expended with the idea that it needs to make growth and then be paid back.  One analogy that I like to use is looking at America, the country, like it was a stock and a company.  The legislation is more like the stock price and the implementation and outcome of the stimulus is more like the companies book value, or what the company would be worth if it was liquidated all at once.  Once we make this analogy then we can see it a bit like currency traders do, that the currency is the stock of the country so to speak.  So why the dollar matters is that it is the benchmark indicator against, in the case of the "Dixie", some of the more major currency players, including Canada, the Euro-zone, Sweden, England, Japan, and Australia.  As the benchmark indicator, when the $USD goes up, it would make sense that our stock market would go up too; however, it has been going down when the dollar improves.  That is not really such a mystery either because our stock market is global, not inclusive to just our country.  So when growth indicators kick in elsewhere; namely in China, the steel and copper that builds buildings comes from other countries and that momentum increases stock prices on our market.  To add another layer of complexity, the dollar also matters because all commodities are traded in US currency.  That is just historical development more than anything and shows the huge role the US has played (and continues to play) in developing a lot of the world.  So, when asked about the role of the dollar and why it matters, these are the reasons why it matters.  These reasons become even more important in a country where the Fed has taken the rates to zero and represent how we are doing in a global economy of multiple countries financing their recovery.

Disclosure: none