But something strange happens 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 good return on government debt often look to high-risk developing countries because they pay high interest rates. When the Federal Reserve raises interest rates, investors realize they can get those payments risk-free and move their money to the United States instead. This boosts the dollar but sends developing market currencies into a tailspin.
The Fed’s trade-weighted dollar index, which measures the value of the USD based on its competitiveness with its trading partners, is up 10% this year against currencies of other advanced economies, its most high level since 2002. In comparison, the dollar is on the rise. only 3.7% against emerging market currencies.
Bad for business: S&P 500 companies that have a global footprint also have to deal with the strong dollar that is holding back their revenue growth. About 30% of revenue for all S&P 500 companies is made in markets outside the United States, Krosby said. During the earnings season, a number of companies said the strong dollar had already hurt revenue growth.
LPL Financial estimates that the strong dollar took 2 to 2.5 percentage points off S&P 500 earnings in the second quarter.
The bottom line: Dollar strength should stop picking up when the Fed stops climbing, Krosby said. But there are external forces that could keep the value of the USD high even after the FOMC cancels it: the current weakness in the euro and other currencies is not just about the Fed. It also reflects investors’ fears of an impending recession in Europe. They are flocking to the safe haven that is the dollar, at least for now. Expect the greenback to remain strong for some time.
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 really looking for.
“He can’t quite say that, but if the unemployment rate goes up to 4% or 5% or 6%, inflation [probably] be a little tame,” 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 will rise to 6%. It doesn’t sound very politically appealing to say that.”
“There will be a lot of job losses. The Fed will not publicly say, ‘We want job losses,'” Rubenstein said.
Rubenstein said Powell was “a very smart and hard-working person” but underestimated how bad inflation would be. “We sometimes think of Fed chairs as 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.”
Track private equity
Jerome Powell’s current notoriety can only be usurped by one person: Kim Kardashian. Now she is entering her territory and coming to Wall Street.
Momager of 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 Chairman Jerome Powell speaks at the Cato Institute at 9:10 a.m. ET.
▸ European Central Bank rate decision.