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This is an article on the outlook for the U.S. greenback (DXY) as we undergo one more greenback doom cycle. Investors ought to watch out for analysts who’ve been calling for the demise of the U.S. greenback for twenty years.
Dollar doom retailers and the Jay-Z hip-hop high
In late-2007, two months after the collapse of Lehman Brothers funding financial institution. The markets had been nonetheless in complacency mode and the euro had damaged the earlier all-time highs in opposition to the US greenback at 1.38. The single currency was buying and selling at 1.45 and traders had been calling it the tip of greenback dominance.
At the identical time, rapper Jay-Z had simply launched a video for the track Blue Magic, taken from his American Gangster album. However, the important thing speaking level in regards to the video was that the Brooklyn entertainer was seen flashing wads of euro notes, in distinction to the hip-hop style’s love of US greenback payments.
That set tongues wagging within the worlds of leisure and finance, which peaked with criticism from veteran stock market promoter Jim Cramer. The Mad Money host accused the hip-hop mogul of “undermining the already weak dollar”. The transfer by Jay-Z fueled debates within the hip-hop neighborhood about whether or not different artists must be paid in euros.
Even Britain’s BBC mentioned the approaching monetary earthquake in an article titled: Rapper Jay-Z Dissing the Dollar. It was additionally famous that supermodel Gisele Bundchen was additionally trying to diversify away from the dollar.
According to the BBC, “The catwalk star’s twin sister and manager Patricia told Bloomberg in September that: “Contracts beginning now are extra engaging in euros as a result of we do not know what’s going to occur to the greenback.”
Another article from that point mentioned a sea change within the hip-hop neighborhood: When rapper Jay-Z talks about euros, folks hear.
“The euro incident additionally was famous within the monetary sections of papers around the globe. Every week later, a much-read Bloomberg merchandise centered on Jay-Z’s video and Brazilian supermodel Gisele Bundchen’s public request to not be paid in U.S. {dollars}. In some locations, each had been praised for greedy that the greenback was out, and the euro was in.”
Ms. Bundchen was just lately a giant sufferer within the FTX crypto alternate fallout, shedding an estimated $70 million alongside Tom Brady. Investors ought to watch out for listening to superstar influencers on something finance-related.
The great U.S. dollar rotation into euros didn’t pan out well
What happened next was that the delayed effects of the Lehman Brothers financial crisis finally caught up to financial markets and the euro peaked around the 1.60 level a few months later. (The euro is now at 1.10).
After the 2014-15 European debt crisis slammed the euro to lows around 1.04, the resulting recovery has been beset with problems and the 1.20 level proved stubborn resistance before the recent collapse to parity against the US dollar in 2022.
So let the champagne pop. I partied for a while; now, I’m back to the block Jay-Z, Blue Magic
The low may not be in for the euro despite the European Central Bank grudgingly raising interest rates for the first time in eleven years. Inflation was soaring in the eurozone but has since cooled. The real risk for the euro is what happens with Ukraine. Investors should not be complacent about a peace deal and safe haven flows from Europe to the U.S. are still possible after investors got burned from the rushed merger of UBS and Credit Suisse.
The other reason that the ECB was slow to raise rates is that they are sitting on a pile of worthless junk debt issued by heavily-indebted nations such as Italy. Dollar doom analysts drone on about the U.S. debt levels and fail to mention that Europe is a similar state.
In the United Kingdom, the bond market blew out in September 2022, after a proposed spending plan from the Cabinet of Liz Truss. The Prime Minister lasted 45 days in the role but her budget simply highlighted that the UK has got no more room to spend, according to bond investors.
So if markets are to flee the U.S. greenback and might’t go to Europe or the U.Ok. what about Japan? Bond market guru Jim Grant summarized the issues within the nation in relation to the UK.
I think Japan is perhaps the most important risk in the world… The risk is this: Every business day, the Bank of Japan is spending tens of billions of dollars worth of yen to enforce Governor Kuroda’s yield curve interest rates suppression program. To put this into perspective: In the UK, when the little crisis over liability-driven pension investing in late September happened, the Bank of England spent around $5 billion. The BoJ does that before breakfast.
Finally, we have China. With a wobbling property market and a risk of a war between the U.S. and China, should investors in the U.S. sell out of the greenback and move to the yen or yuan? The “analysis” of dollar doom merchants is very two-dimensional with too few variables considered.
The U.S. dollar will be the last currency to crash
I wrote a book called “The Stock Market is Easy,” which is based heavily on investment psychology. It’s worth taking a moment to consider the hip-hop euro top because there were parallels with other U.S. dollar substitutes. In 2021, when Bitcoin was trading over $60,000, we had the same speculative environment, where sports stars and celebrities asked to have their salaries paid in cryptocurrency. People tend to extrapolate a trend and assume it will continue, while it is more valuable to dig deeper and look for headwinds. Confirmation bias versus contrarian analysis.
I’ve been reading about the Greenback’s demise for around 20 years now when investors were talking about the U.S. debt in 2005. Many of today’s gold and anti-dollar analysts are dealing with a bruised ego from 10-20 years of failed predictions and dead money.
What the majority of these analysts fail to understand is that the world’s reserve currency will be the last to collapse in a crisis.
The comments I made above about the yen and the yuan highlight the lack of foresight from anti-dollar analysis, but it is only scratching the surface. The U.S. is the world’s reserve currency because it is home to the world’s largest financial markets. Will trillions of dollars in pension funds and bonds move to New Zealand or Brazil? Maybe it could all move to the Argentine or Thai stock market?
The U.S. greenback could have its dangers however they’re the identical dangers as the opposite main international locations. Capital has no skill to park billions in BRICs international locations and can by no means accomplish that with a rising risk of warfare. There have been comments that China will invade Taiwan as early as 2025. So what do traders assume will occur to the tons of of billions invested by the U.S. in China? Will allies of the United States, similar to Europe, maintain their money in China?
I believe that the current standoff over the U.S. debt ceiling will result in a deal, the regional banking crisis has been contained with all deposits being covered regardless of bank failures, while investors would be crazy to dump the U.S. with the potential for war on the horizon. The anti-dollar frenzy is the same thing I have heard for twenty years and the analysis is become more amateur as time goes on.
The DXY is still in an uptrend on the yearly chart and support at the 100 level could see a big rally in the index to the 120 level.
Markets have gotten 99 issues, however the buck ain’t one.