When Less Bad = Good
Jul 22, 2022
For the last year, the U.S. dollar has been gaining strength. Last week, the dollar reached its peak when it traded at parity with the euro for the first time in two decades. The irony of this is that it comes at a time of rising inflation, typically a situation associated with a weakening dollar.
It’s fair to question what is driving the dollar. Simple economics would suggest when something is available in abundance, its value would fall, i.e., inflation. And the myriad of ways in which we’ve created money out of thin air in the last decade-plus have resulted in the money supply being more than three times where it stood back when the financial crisis roiled the world back in 2008.
So what is driving this strength at a time conventional wisdom would suggest the dollar should be weakening? Well, sometimes being less bad is just as good as actually being good.
Despite vaccine developments at unprecedented speed, Covid still grips the world. People continue getting sick. In fact, they can get miserably sick. Still, in most cases, getting sick with Covid is favorable relative to say, something like cancer. Neither situation is what anyone would want, but in a situation where bad choices are all that’s available, the less bad wins out. That is what is happening with the dollar.
For all the domestic issues we face, from political to economic, the fact of the matter is we are better positioned with a better outlook than much of the world. Europe is compromised by the war in Ukraine. Natural gas, oil and other commodity prices and availability remain very much at risk. As an example, at any point, Russia could decide to stop supplying much of Europe with natural gas. The instability of the situation shows no sign of abating anytime soon and also comes at a time of political turmoil in England and Italy where both Boris Johnson and Mario Draghi have been forced from office in the last month.
Since its inception, the European Union has not faced challenges like it currently does. There are few things going well at the moment. You don’t have to take my word for it. Simply look at the decline in the euro.
In the meantime, China can’t seem to get out of their own way. A crackdown on companies and government overreach is causing unnecessary economic challenges. Politically, President XI is attempting to rewrite the rules as he seeks a third term and his tacit support for Russia’s invasion of Ukraine hasn’t helped. In totality, China is doing nothing to inspire market confidence.
Markets have a way of cutting to the heart of matters and telling you all you need to know. Typically, we associate currency strength with good news. But sometimes good news is simply just not “as bad” news. Markets make no distinction between the two. And the fact of the matter is, despite a world filled with challenges, the challenges being confronted domestically are not as bad as the challenges being faced in the rest of the world.
Did you see this week's episode of Truth or Skepticism, Euro Reaches Parity with Almighty US Dollar? Check it out.
Special Projects writer Josh Fabian contributed to this article.
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