Cool Video: Bloomberg TV–Dollar Supercycle and Brexit

I was on Bloomberg TV earlier today with Tom Keene, the one of a kind anchor, and Booth Business School Professor Luigi Zingales. 

In the first clip, we look at the Federal Reserve’s broad trade weighted index of the dollar.  It rose 0.65% in September.  It is the fifth month this year, this measure of the dollar increased.  It rose nine months in 2015.  It is 1.75% lower since the end of last year.  

The US dollar has had two other significant rallies since the end of Bretton Woods, which I dub the Reagan Dollar Rally and the (Bill) Clinton Dollar Rally.  It is now in the middle of the Obama Dollar Rally.  As I have suggested previously, I expect that before the Obama Dollar Rally is over, the euro will retest the record lows it set in 2000 near $0.8250.  

The drivers are divergence of monetary policy (and related elements, like health of the respective banking sectors) and politics, assuming that Trump does not become the US President.  Next year, France and Germany hold national elections.  It is possible that political forces of nationalism rise on one hand, and that the center-right parties tack to the right to try to steal some of that thunder, on the other, make for a difficult climate for investors.  

The second clip is about Brexit.  UK Prime Minister May indicated over the weekend her intention to initiate Article 50, which begins a two -year negotiating process, leading to the UK no longer being a member of the EU.  Although the UK’s economic data has held up well, as businesses reconsider hiring and investment decisions, it is difficult to envisage how this will be good for the UK.  I suggest that the quest for sovereignty is an illusion.  It will be heavily influenced by the policies of its largest trading partner, the EU, and will have abandoned its ability to influence its rules. 

It has been convenient to blame the EU for all that ails the UK.  The UK may cease being subject to EU laws and regulations, but British businesses and households will find that UK law will replace it and substantively there may not be much of a difference.  Former UKIP head Farage was quoted in suggesting that being less prosperous is ok if there are fewer immigrants.  The integration of the businesses and the capital markets, and the internationalization of important challenges, including security, disease, and climate change,shrink the scope of sovereignty.  

On Bloomberg radio, which I appeared on following the TV show, I pointed out that Sweden, which has its own central bank and own currency, like the UK, is pursuing a monetary policy that is shadowing the ECB.  Switzerland, which unlikely Sweden is not part of the EU, has limited monetary sovereignty, and like Norway, has had to sacrifice some elements of sovereignty into order to get access to the EU market.  

Lastly, I told Tom Keene, what I have hinted at on these pages.  I have been working on a new book that will be released in early-December or early-January.   Click on the Noteworthy Posts to get a sense of the themes of the new book.   Stay tuned.  


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