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The U.S. Dollar Has Just Found Its Next Victim

By Michael KramerForexAug 19, 2022 03:38AM ET
www.investing.com/analysis/the-us-dollar-has-just-found-its-next-victim-200628717
The U.S. Dollar Has Just Found Its Next Victim
By Michael Kramer   |  Aug 19, 2022 03:38AM ET
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  • The dollar has strengthened materially in 2022
  • Recently, China’s economy has gone through a significant slowdown
  • This has resulted in the US dollar strengthening against the Chinese yuan

The US dollar index is on the move again and is inching closer to moving to its recent highs. It seems that the dollar has found a new currency to strengthen against, and this time it is against the Chinese yuan.

Much of the dollar's strength in 2022 has come against the euro and yen. The falling value of the euro versus the dollar is due to a weakening European economy and a European Central Bank that has lagged a much more aggressive Federal Reserve. Meanwhile, the Bank of Japan's pledge to keep rates low has allowed the dollar to rally against the yen.

US Dollar Daily
US Dollar Daily
With the Chinese economy faltering, new rounds of stimulus, and even a rate cut, the dollar has moved higher against the yuan. Between April and May, the dollar had strengthened materially against the yuan, rising to roughly 6.75 from approximately 6.35 but stalled out.

That all changed over the past week, as weaker economic data and the PBOC move to cut its one-year rate by 10 basis points to 2.75%. That helped to strengthen the dollar against the yuan to around 6.80 from 6.74. It is not a big move to this point, but if the Chinese economy remains weak and its central bank moves to cut rates further, it could strengthen the dollar even more against the yuan.

Of course, should the dollar begin to strengthen against the yuan, it could create another FX headwind for many multinational companies that conduct business in China. This would likely negatively impact revenue and earnings for these businesses, potentially adding further stress to companies that have already seen FX hits this year.

USD/CNH Daily
USD/CNH Daily
Because China is the US's most significant trading partner, a stronger dollar could also greatly benefit many companies. The stronger the dollar gets against the yuan, the cheaper imports from China will become. This could help some companies offset inflationary pressures here in the US.

Of course, the stronger the dollar gets against all currencies, the bigger the hit for the entire stock market. A strong dollar will negatively impact earnings and sales estimates for the broader indexes. This has already been an issue this year for many companies, but if the trend of dollar strength continues, the more significant the headwind.

The Fed is still likely to be on a path of raising rates for some time while economies in Europe and China struggle. Given that backdrop, it seems likely that the dollar will continue to be a headwind for corporate earnings and stock markets in the foreseeable future, even though it may have stalled out against the euro and yen momentarily.

For now, the dollar needs to be monitored, as it will significantly impact markets.

Disclaimer: Charts used with the permission of Bloomberg Finance LP. This report contains independent commentary to be used for informational and educational purposes only. Michael Kramer is a member and investment adviser representative with Mott Capital Management. Mr. Kramer is not affiliated with this company and does not serve on the board of any related company that issued this stock. All opinions and analyses presented by Michael Kramer in this analysis or market report are solely Michael Kramer's views. Readers should not treat any opinion, viewpoint, or prediction expressed by Michael Kramer as a specific solicitation or recommendation to buy or sell a particular security or follow a particular strategy. Michael Kramer's analyses are based upon information and independent research that he considers reliable, but neither Michael Kramer nor Mott Capital Management guarantees its completeness or accuracy, and it should not be relied upon as such. Michael Kramer is not under any obligation to update or correct any information presented in his analyses. Mr. Kramer's statements, guidance, and opinions are subject to change without notice. Past performance is not indicative of future results. Neither Michael Kramer nor Mott Capital Management guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment commentary presented in this analysis. Strategies or investments discussed may fluctuate in price or value. Investments or strategies mentioned in this analysis may not be suitable for you. This material does not consider your particular investment objectives, financial situation, or needs and is not intended as a recommendation appropriate for you. You must make an independent decision regarding investments or strategies in this analysis. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Before acting on information in this analysis, you should consider whether it is suitable for your circumstances and strongly consider seeking advice from your own financial or investment adviser to determine the suitability of any investment.

The U.S. Dollar Has Just Found Its Next Victim
 

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The U.S. Dollar Has Just Found Its Next Victim

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Comments (14)
Jeff
Jeff Aug 22, 2022 4:49AM ET
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Watch every day!
YC Teng
YC Teng Aug 21, 2022 9:46PM ET
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I thought USD has pummel GBP further, it is at all time low and likely to test lows since Soros' run at BOE decades ago 🤔
Saun Melkon
Saun Melkon Aug 20, 2022 7:41AM ET
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So exporters devalue their currency in order to sell more to a country with the stronger currency. They can then exchange the stronger currency for the local currency and buy more goods and services at home, eventually raising prices and inflation for everyone (whilst paying more for intermediate goods necessary to generate export products). Who wins? The few who get their hands on the stronger foreign currency first. Who loses? Ninety-nine percent of the rest of the people. Could the 99-percent of the people be that foolish? Rhetorical question.
Mohd Izhar Muslim
Mohd Izhar Muslim Aug 19, 2022 1:50PM ET
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Thanks for the article 👍
Oluwafisayo Aknlosotu
Oluwafisayo Aknlosotu Aug 19, 2022 10:08AM ET
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There is nothing driving the usd just speculations,all because of interest rates
Rafik Rafik
Rafik Rafik Aug 19, 2022 9:37AM ET
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Rafik
Sue
Sue Aug 19, 2022 8:43AM ET
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if the dollar is going up shouldn't gold go down?
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John Cerniuk
John Cerniuk Aug 19, 2022 8:43AM ET
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they dont move lock step
Dalton Masters
Dalton Masters Aug 19, 2022 8:43AM ET
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lol you must be new
Brett Nova
Brett Nova Aug 19, 2022 8:43AM ET
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Clearly it's down today 🤷
Brett Nova
Brett Nova Aug 19, 2022 8:43AM ET
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Clearly it's down today 🤷
Brett Nova
Brett Nova Aug 19, 2022 8:43AM ET
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Clearly it's down today 🤷
Brain Stormm
Brain Stormm Aug 19, 2022 8:24AM ET
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You can all say good bye to usd. Russia and China will finish it. You can use USD to steal from Europe.
Dalton Masters
Dalton Masters Aug 19, 2022 8:24AM ET
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yep
Roger Pruzansky
Roger Pruzansky Aug 19, 2022 6:36AM ET
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no stock market believe it or not will hit new highs soon. I know this sounds insane but look at 2020 and think no economy did what?
Roger Pruzansky
Roger Pruzansky Aug 19, 2022 6:35AM ET
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no stock market believe it or not will hit new highs soon. I know this sounds insane but look at 2020 and think no economy did what?
 
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