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Yesterday was a big day for the market. The mother of all economic data reports created its usual commotion. That is, U.S. Non-Farm Payrolls were released … and the numbers gave analysts plenty to talk about.
The U.S. lost 524,000 jobs in December. And as bad as that looks, earlier rumors had the markets preparing for much larger losses. The unemployment rate, on the other hand, jumped more than had been expected — up to 7.2%.
Yet, the resulting price action for the U.S. dollar was rather good. In fact, following yesterday’s unemployment announcement, the dollar made serious gains against the euro and the Swiss franc. The buck also gained some ground on the rest of the majors.
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| The dollar rallied yesterday, despite the dismal jobs report. |
To some market watchers, this reaction may seem bizarre …
After all, a crummy economy can’t be good for a nation’s currency. But in this instance the market is reacting based on one simple fact: The U.S. holds the key to the global economy.
More on that in a moment.
First, let me explain why …
Obama’s Stimulus Package Will Have
Little Impact on the U.S. Dollar
It’s unlikely that the Obama stimulus package will have any notable, direct influence on the way the U.S. dollar behaves in the first half of this year. That’s because such efforts will prove ineffective at altering the fundamental forces driving the economy and, to an extent, the markets.
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Obama’s stimulus won’t be any different from previous government bailout efforts — at least as far as spending goes. The fact is, his plans to pump money into infrastructure are not concrete — we don’t know exactly what he means and exactly where the money will go.
Very likely, the money won’t go toward the immediate and most necessary interests that would normally be defined by the free market.
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| My bet is that consumers won’t go on spending sprees when they get their stimulus checks. |
But let’s assume for a moment that some money gets to the consumer or the small business. What will they do with the funds? My bet is that they won’t go on spending sprees. Instead, they’ll use it to bolster their balance sheets — a process that’s already begun and is bullish for the dollar.
What’s in Store for Currencies
A sharp return to inflation seems like an obvious conclusion considering the sheer amount of money that’s being created and thrown at our country’s economic problem. Such a turnabout would cause me to reconsider my expectations for an ongoing U.S. dollar bull market.
And given the Obama “spend our way to prosperity” speech on Thursday, investors may wonder why the dollar hasn’t cratered and gold isn’t soaring to new heights.
But timing is critical here …
Many inflation proponents expect an environment of sharply rising prices to return with, or even just before, a recovery of the global economy. They admit the U.S. economy is in deep trouble for many years to come but fail to give the U.S. economy the credit it’s due.
You see, a lot rides on the U.S. economy — specifically the country’s consumers. And the consumer depends on jobs, and jobs depend on business wealth creation.
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The U.S. consumers’ recent spending patterns have created tremors across the global economy. We’re witnessing a period of demand destruction.
And for economies built around supplying U.S. consumers with goods, and economies built around supplying the materials to make those goods, deteriorating consumer demand is the worst possible scenario.
Right now governments throughout the world are throwing around money to stimulate demand. But unfortunately, consumer attitudes have changed to the point where demand stimulation will likely prove ineffective — sentiment toward taking on more debt has changed and has been replaced by real fear.
Adjustments to supply are necessary to get the U.S. economy back on track — that’s one of the things recessions are designed to do. And this means with a wallowing U.S., the rest of the world slows down even faster.
Again, in currencies, it’s all relative. It may seem perverse for the U.S. dollar to rally through this. But considering the ramifications of this global rebalancing, maybe it makes sense for the rest of the currencies to lose out.
Best wishes,
Jack
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