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Why Does The U.S. Dollar Keep Rising?

By Charles Hugh SmithMarket OverviewNov 27, 2016 01:02AM ET
www.investing.com/analysis/why-is-the-us-dollar-rising-200166698
Why Does The U.S. Dollar Keep Rising?
By Charles Hugh Smith   |  Nov 27, 2016 01:02AM ET
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So where will mobile capital flow in an environment of rising socio-political risk, a multi-year USD uptrend and a dearth of safe, liquid markets?

On October 3rd I asked Is the U.S. Dollar Set to Soar? It seems the answer was yes. Here's the weekly chart of the USD I posted on October 3rd:

USD Weekly 2014-2016 as of October 3, 2016
USD Weekly 2014-2016 as of October 3, 2016

And here's the current weekly chart of the USD:

USD Weekly
USD Weekly

Note the apparent breakout above 100 and the constructive similarities to the 2014 breakout that was followed by a 20% increase in the purchasing power of the USD relative to other currencies.

This begs the question: could the US dollar be starting another extended leg higher that would eventually take it to 120, a 20% gain from its current level?

This raises a further question—why shouldn't the USD rise another 20%? Longtime readers are all too familiar with my many essays on the US dollar over the past four years, and so they shouldn't be surprised that the USD is moving higher.

While I have great respect for the analytic skills of the many dollar bears who have expected the USD to decline or collapse, we all have to respect the market's movement. In the case of currencies (which trade in the trillions of dollars daily), it's difficult to make a persuasive case that currency trends are driven by central bank interventions.

Policies such as interest rates and bond-buying, yes—intervention, not likely. The currency markets trade the entire Federal Reserve balance sheet—roughly $4 trillion—every two days.

So we have to look beyond manipulation for explanations of the USD's uptrend.The conventional view—which I have shared—is that the trend toward higher yields in the U.S. acts as a magnet for capital in a zero or negative-yield global economy.

The other dynamic that have been widely covered is the demand for USD to pay loans denominated in dollars.

While these explanations make sense, they don't tell the whole story.

Let's start with the foundation of currency supply and demand: capital flows.

The key characteristic of financial capital is its mobility. Mines and farmland are immobile, factories are costly and time-consuming to move, and labor is only mobile on the margins: the majority of the workforce is anchored by family, language and familiarity to their country or region of origin.

Moving to a new locale and new type of work is costly in terms of time, money and effort, and fraught with risks.

Now compare the ease of moving electronic money around the world. A few clicks and a few seconds are all that's needed.

The story of the financialization and globalization of the planet's economy is ultimately a story of easing the flow of capital. The neoliberal philosophy places a premium on easing capital flows in and out of any market, and turning every corner of the world into a market that is accessible to mobile capital.

As Marx foresaw, this removal of obstructions to the movement of finance capital has elevated finance capital to the dominant form of capital: industrial capital is no match in mobility and thus in profitability.

China is a good example of this. Chinese manufacturers typically operate on razor-thin margins, and many state-owned enterprises lose money and are only kept afloat by subsidies or state-bank-issued loans that are forms of state subsidies.

The big money being made in China is financial, not industrial. This story is repeated everywhere that capital has mobility. In emerging markets, hot money flooded in when the USD was in a downtrend, inflating bubbles in local real estate, stock markets and commodities as finance capital reaped the profits from rising emerging market currencies.

When the USD trend reversed, mobile capital cashed out and left the emerging markets in a digital flood tide. The mobile-capital driven bubbles in currencies, stocks, real estate and commodities all deflated, devastating markets and the social structures that depend on markets' expansion.

The global rise of populism is raising doubts about the stability of a status quo that has greatly enriched the few at the expense of the many. This rising wealth/income inequality is the result of mobile capital's ascendance to supremacy in profitability and political influence.

So where will mobile capital flow in an environment of rising socio-political risk, a multi-year USD uptrend and a dearth of safe, liquid markets? To answer, put yourself in the shoes of a manager responsible for $10 billion. You want to gamble billions in this environment on bat guano futures or hotel developments denominated in illiquid currencies?

Or would you rather buy USD-denominated assets that will gain in value regardless of their yield as the USD marches higher, and be able to sleep at night?

There is much more to say on this subject, and I will endeavor to add to this topic in future essays.

Why Does The U.S. Dollar Keep Rising?
 

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Why Does The U.S. Dollar Keep Rising?

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Comments (7)
Ahno Nymuz
Ahno Nymuz Nov 28, 2016 6:11PM ET
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120? Your face lol
Abdul H Jaffar
theoffshoreT Nov 27, 2016 6:20PM ET
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Great article!..So Dollar value rises partly because of the anticipated interest-rate hike..or yield increase for US bonds holders..I imagine it's going to be quite a challenge for Trump to finance his fiscal expansionary policy in such an environment..any thoughts you can share on this?
Beast Mode
Beast Mode Nov 27, 2016 10:08AM ET
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Things are playing into the Dollars hands, Brexit and the mere mention of it sends the GBP and EUR tumbling, bad leadership in the EU in general including the useless drawn out overpaid non-entity Draghi is, recent selling of bonds, good sales, Feds hinting at rate hikes and one never knows how the the dollar will response to the death of Fidel. That is why the dollar is not crashing as the price of Gold is. IMO America has not done anything special, everything is crumbling around it!
Beast Mode
Beast Mode Nov 27, 2016 10:08AM ET
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Does anyone know that Draghi is paid more than Yellen? Yellen basically has been nursing the world, as Draghi prays Yellen does not raise interest rates after he has exhausted all quantitative easing policies there is at his hands. Look at the EUR literally in a position as if America has raised rates!
Brad Smith
Brad Smith Nov 27, 2016 10:08AM ET
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I don't think I could have said it better myself. You nailed it when you said everything else is crumbling around the dollar. The EUR has shown significant weakness and this weakness does not look like it will be going away anytime soon.
Daniel Vandenberg
Daniel Vandenberg Nov 27, 2016 9:56AM ET
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And when the Music Stops someone's going to be left holding the bag.
Michael Keyser
Erutan409 Nov 27, 2016 9:32AM ET
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More people have hope in the US now than in the last 8 years..?
Andrew Davis
Andrew Davis Nov 27, 2016 9:30AM ET
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Because it going to fall back soon and very soon
glengarry glenross
glengarry glenross Nov 27, 2016 9:29AM ET
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Your insane.. $120...lmao..it will crash
Ahno Nymuz
Ahno Nymuz Nov 27, 2016 9:29AM ET
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Thats insane analysisb 120! Lol
 
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