This morning, Bloomberg News reported the strengthening of the U.S. dollar. Citigroup sees this as the foreign-currency exchanges anticipating the end of the Federal Reserve’s monetary stimulus. Bloomberg News’ slant was this: Since the U.S. economy is strengthening, the Federal Reserve will pull back on its quantitative easing efforts.
I’m taking a contrarian view: The gain in the dollar isn’t based on some new-found confidence in the U.S. economy, but rather currency investors are simply seeking a safe haven in the coming deluge of economic weakness, taking advantage of the U.S. dollar’s global reserve currency status. Consider the recent headlines:
- New York region’s manufacturing shrank for the fourth month
- Jobless claims jumped in November of 2012
- Euro area slumps into a recession for second time in four years
- Consumer prices rose at a slower pace in October of 2012
- U.S. industrial production drops 0.4%
- Economist anticipate the United kingdom’s GDP shrinking in 4Q 2012
- A recession looms in Japan
The upshot of all this is that as the dollar strengthens in a counter-intuitive cycle – after all, the Fed’s quantitative easing efforts should be weakening, not strengthening the dollar – this only encourages the modern monetary theorist’s thinking that the U.S. dollar has found some new reality, and monetary and fiscal stimulus can continue unabated.
This reminds me of the economists who, in the late ’90s, proclaimed the U.S. economy had become recession proof. Read the rest of this entry →