We've spoken a lot about the dollar of late on Breakout. Frankly even market wonks like us generally find the topic to be "arcane" at best and "stultifying" at worse.
Alas the greenback matters, not just to our sense of national esteem, but to your portfolio. So it was that we turned to David Joy, the chief market strategist of Ameriprise Financial to give us some insight and, at the very least, inject the word "joy" into a discussion of currency.
Despite a recent click higher by the dollar against the euro, Joy sees the move as simply a short-term correction of the crowded euro-up, greenback-down trade. Why? Well, no matter what the U.S. may say to our trading partners about our preference for dollar strength, we continue to print dollars like drunken counterfeiters. It's not an effort by the U.S. Treasury to stimulate the cotton industry (today's dorky fact: the dollar is made of cotton, not trees), but the economy as a whole. The issue is as much philosophical as strategic.
"What's wrong with the dollar," Joy explains, "is that (the U.S.'s) first response to a downturn is reflation. Let's throw everything but the kitchen sink at this ... And maybe including the kitchen sink." The European Union, in contrast and perhaps as a function of Europe's disastrous history with inflation, has a knee-jerk response to an economic crisis of moving to austerity.
Ignoring America's global leadership position in pop culture, software, violent crime and freedom-enforcing cruise missiles, Nesto suggests the country's "number one export right now is inflation" and prophesies that such a policy will eventually "bite (us) in the backside."
Joy takes the other side of Nesto's Camus-esque existentialism and says a weak currency can, in fact, help in a number of ways, particularly for multinational corporate earnings, as well as satisfying debt obligations. Selling debt then paying it back later with a weakened currency is indeed a nice way to do business ... at least until your trading partners start balking at the trade.
For that reason and others, Joy sees some sort of conflict coming between the European austerity and the American money-dump. "Both cannot be right," says Joy. Until there's some resolution, he expects the "dollar will be persistently weak."
As often noted, I'm somewhat guardedly bullish on the dollar against the euro and the somewhat intellectually mushy grounds that the U.S. may be a mess but at least we're not Europe.
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- The European Union
- Ameriprise Financial