Where is the dollar going?
Last night we had an election. Republicans took control of the Senate and expanded their control of the House. Millions of Americans took to the polls to express their political preferences.
But a different election has been taking place—one where anyone, anywhere can vote. And this election happens every day. This occurs in the financial markets—stocks, bonds, and currencies. Voting requires only dollars, not sense. And lately they’ve been expressing confidence in the US economy.
The trade-weighted dollar has been rising.
Since July the value of the dollar, as measured against a basket of currencies, is up about 10%. This reflects a falling Euro—as the Continent slides towards its third recession in six years—and a falling Yen—as Japan expands its money supply in an attempt to reinvigorate its economy. But it also reflects fundamental strength in the US economy. Consumer confidence is higher; unemployment is lower; factory orders are up; credit is expanding.
As a result, both trade and investment flows favor our currency. It’s true that a stronger dollar will crimp exports on the margin, but it’s domestic activity, not foreign commerce, that’s drives the US economic engine. And the trade balance has been improving in any case, thanks to significantly lower energy imports.
So don’t get too worked up about yesterday’s vote. The world markets are a grand stage, where a performance is played out every day. It’s economics, not politics, that writes this drama.
Douglas R. Tengdin, CFA
Chief Investment Officer
Leave a comment if you have any questions—I read them all!