I was part of the “Trading Block” on CNBC earlier today. The sharp fall in stocks and oil would have led many, like Joe, to anticipate dollar weakness. Instead, the dollar rallied. Perhaps, I suggested, the dollar was acting like a safe haven. Bill yields are high enough to make cash a reasonable alternative to park one’s savings. Even though the US economy is slowing from the fiscal goose of more than 4% in Q2 and more than 3% in Q3, it remains above trend. This puts the US in an enviable position of being able to absorb the shocks,. Admittedly, some of which are of its own making.
The oil discussion was also fascinating. How much of the decline is due to supply and how much is due to weakening demand? There is also a short discussion of the equity market and the role of trade tensions vs. fear of a slowing economy. I would tend to emphasize supply drivers for oil, and, in particular, the six-month exemption for Iran’s largest customers.
I see the US economy continuing to expand above trend, and with the fed funds target below the rate of inflation, nearly any other qualified person who was going to head the Federal Reserve would see higher rates as appropriate. There is still some fiscal stimulus in the pipeline and an agreement to make permanent US middle-class tax cuts may be hard to resist, and there is an outside chance of an infrastructure bill. The divergence and US policy mix have more room to run, I think, and this continues to underpin my constructive outlook for the US dollar.