But something strange is happening during this ascent. The dollar is currently appreciating more against the currencies of rich economies than it is against those of emerging markets.
Investors looking for a nice return on government debt often turn to high-risk developing nations because they pay out high interest rates. When the Federal Reserve raises interest rates, investors realize they can get those payouts without the risk and move their money to the US instead. That boosts the dollar but sends the developing market currencies into freefall.
The Fed’s trade-weighted dollar index, which measures the value of the USD based on its competitiveness with trading partners, has grown by 10% this year against currencies of other advanced economies, its strongest level since 2002. By comparison, the dollar is up just 3.7% against emerging markets’ currencies.
Bad for business: S&P 500 companies that have a global footprint also have to deal with the strong dollar making a dent in their revenue growth. About 30% of all S&P 500 companies’ revenue is earned in markets outside the US, said Krosby. During earnings season, a number of companies said that the strength of the dollar had already hurt revenue growth.
LPL Financial estimates that the strong dollar took 2 to 2.5 percentage points out of S&P 500 revenue in Q2.
The bottom line: The strength of the dollar should stop accelerating when the Fed stops hiking, said Krosby. But there are outside forces that could keep the USD’s value sky high even after the FOMC calls it a day: The current weakness of the euro and other currencies isn’t just about the Fed. It also reflects fears from investors of an impending recession in Europe. They’re flocking to the safe haven that is the dollar, at least for now. Expect the greenback to stay strong for a while.
What the Fed won’t say out loud.
The Fed is notoriously cautious with what it says. Billionaire investor David Rubenstein has some thoughts on what the central bank is actually after.
“He can’t quite say this, but if the unemployment rate goes up to 4% or 5% or 6%, inflation will [probably] be tamed a bit,” Rubenstein said of Powell, whom he hired a quarter-century ago to work in private equity, “But he can’t come out and say, ‘I hope the unemployment rate goes up to 6%.’ That doesn’t sound politically very attractive to say that.”
“There will be a lot of job losses. The Fed isn’t going to publicly say, ‘We want job losses,'” said Rubenstein.
Rubenstein said Powell was a “very smart, hardworking person” but that he underestimated how bad inflation would be. “We sometimes think that the chairmen of the Fed are people who are gods,” Rubenstein said. “Alan Greenspan was almost a god. Paul Volcker was almost a god. But these people put their pants on one leg at a time. They make mistakes.”
Keeping up with private equity
Jerome Powell’s current notoriety can only be usurped by one person: Kim Kardashian. Now she’s entering her territory and coming to Wall Street.
Momager to the stars, Kris Jenner, will also join SKKY as a partner.
Here’s hoping there’s a Kim Takes Wall Street reality spinoff in our future.
Also today →
▸ Fed Chair Jerome Powell speaks at the Cato Institute at 9:10 am ET.
▸ European Central Bank rate decision.