Second bonds, particularly treasury bonds. Typically as treasury bonds decrease in value the effective interest rate on that bond rises. Typically these bond set long term interest rates. If this statement is mostly true, I am not a trained economist, then as treasuries fall in value, the interest rates in the U.S. will tend to rise. When the Fed raises interest rates, the dollar rises in value. In effect, everybody but the U.S. gets their currency devalued in relation to the dollar. This makes U.S. good more expensive and everybody else’s less expensive.
As China loses the income from trade, they may NEED to sell U.S. treasuries. I don’t know if those possible sales would be enough to move the market, but if it were, then China could without malice force interest rate and the dollar up.
Second, with only 10 percent tariffs on everybody but China, the business of transshipping and relabeling should really pick up. I might add that considering how much the U.S. needs, not wants, needs, from China I would expect that the U.S. would intentionally not notice this.
Finally, the 90 day suspension of tariffs and the resulting market reaction is probably more of a short cover than a change in direction. The 90 days pause means that for the next quarter no body anywhere in the world can make a financial commitment.
This goes from the banker making car loans, and the wanna be home owner putting contracts on houses to the CEO and investment bankers building a new factory and every business decision in between. What I am saying is that the “pause” is actually worse for the economy than the tariffs. With tariffs you knew what was coming and could make plans to adapt. With a “pause” you can make no plans.
It is unlikely that this will show up in less than 12 months, but I suspect that it will show up.
I certainly don’t understand foreign exchange gyrations, but the dollar index is currently where it was three years ago after declining some YTD. It’s also where it was 22 years ago, 26 years ago, 36 years ago and 38 years ago.
The Federal Reserve dollar indexes are designed to help estimate the overall effects of U.S. dollar exchange rate movements on U.S. international trade. There are three indexes: the broad dollar index, which is constructed using the currencies of the most important U.S. trading partners by volume of bilateral trade, and two sub-indexes, which split the currencies in the broad index into advanced foreign economies (AFE) and emerging market economies (EME).3 This section describes the methodology for constructing these indexes that goes into effect starting in February 2019; the next section describes how this methodology differs from the prior approach; section 3 describes how these changes are implemented; and section 4 examines the effects of these changes.
On the other hand the DXY is made up of 6 currencies. Basically the rest of the developed world.
The DXY, or U.S. Dollar Index, is calculated using a weighted geometric mean of the dollar’s value relative to a basket of six foreign currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. The formula used is USDX = 50.14348112 × EURUSD^-0.576 × USDJPY^0.136 × GBPUSD^-0.119 × USDCAD^0.091 × USDSEK^0.042 × USDCHF^0.036.
So while the DXY has not moved, the Broad Dollar index is pretty high right now. Per the chart it can move quite a lot.
You might notice that 2 of the three biggest trading partners with the U.S. are not captured in the DXY.
If the lever that moves U.S. interest rates moves to the outside of the U.S. we could see a very big change in the world economy on the order of what we saw when the lever that controlled oil prices moved from the Texas Railroad Commission to OPEC.
I dare not predict what that would look like, but I would predict it will not look like anything we have ever seen.
Cheers
Qazulight
P.S. The trade weighted Dollar Index was discontinued by the St. Louis Fed and the broad index is the closest I could find the the same idea.
They are different but similar (as one would expect). For example, the Broad Dollar Index is up 35% from its 2011 lows. DXY is up 37%. It seems reasonable that the dollar is stronger now than it was during the ‘zero-interest rate’ period, but these ratios are indeed ratios and I haven’t followed what was going on with interest rates in other countries.
