The Dog That Didn’t Bark

In a famous exchange between Sherlock Holmes and Inspector Gregory of Scotland Yard, Holmes comments that the most curious aspect of a burglary was the behavior of the dog in the night-time. “The dog did nothing in the night,” remarked the inspector. “That was the curious incident,” answered Holmes.

In normal circumstances, a watch that senses that something is wrong will bark. In this case, he didn’t, indicating that something else was going on. When we look at global markets today, the dog that didn’t bark is the dollar. There’s a civil war in Libya and in Ghana, unrest in Saudi Arabia, a revolution in Tunisia and Egypt and oil is over $100 per barrel. In normal times, the dollar would be rallying as a safe haven. But instead it’s been falling. What’s going on?

Since year-end the dollar has fallen about 5%. It’s now close to the level it was in late 2009, although well above the level it had fallen to in the summer of 2008, before the financial crisis. Currency traders will tell you that the dollar’s recent weakness is due to the European Central Bank’s telegraphing a coming rate hike. Their central bank is worried about inflation, and has to continue to prove its inflation-fighting mettle, in spite of a sovereign debt crisis that will be exacerbated by increased interest rates.

So a month ago the ECB indicated that they plan to raise rates. That has the Euro rallying, in spite of the geopolitical unrest, in spite of the risks to the oil supply, and in spite of continued evidence of an improving economy in the US.

So the dollar’s weakness is an indicator of the market’s focus on Europe. That’s helpful to know. Because the dog that didn’t bark turned out to be familiar with the burglar. And the dollar that didn’t rally is a clue to watch out for what’s happening in Europe.

Douglas R. Tengdin, CFA
Chief Investment Officer
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