Pre-market actions: The US dollar is strong, but something is wrong

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.

But emerging market central banks are also tightening this time around as developed countries keep interest rates relatively low, and so the rules have changed. That, coupled with heightened fears of a war-induced recession in Europe, led investors to turn to the dollar.
Difficulty ahead: Euro at 20-year low against the greenbackand the pound sterling is at its lowest level against the dollar since 1985.

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.

Change comes on top of a number of challenges inflation is already rising in Europe as the continent heading for winter with an impending energy crisis. Japan’s energy import prices are also rising and deteriorating due to the dollar. The top S&P 500 companies, most with large global footprints, aren’t too happy about all this either.
The cycle continues: Fed officials said they would likely continue rate hikes until 2023, so there is little relief to come. “The dollar could rise further if it is not countered by more assertive measures, in particular from the European Central Bank (ECB), which is meeting this week to propose a second rate hike to fight against rising inflation in the eurozone,” said Quincy Krosby, chief global strategist. for LPL Financial.

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.

Rubenstein said to my colleague Matt Egan last week that Fed Chairman Jerome Powell wants higher unemployment even though he can’t say so publicly.

“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.”

The unemployment rate fell in July to 3.5%, tied lowest level since 1969. A jump in the unemployment rate towards 6% would result in a major wave of layoffs.

“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.

Kim K. teams up with Jay Sammons, a former Carlyle Group executive, to launch SKKY Partnersreports my colleague Jordan Valinsky. The company will invest in fast-growing companies across multiple industries, including hospitality, media and consumer products.
The pair will take majority and minority stakes in companies, they told the the wall street journal. “What’s exciting is sitting down with these founders and finding out what their dream is,” Kardashian told the Journal. “I want to support what it is, not change who they are in their DNA, but just support them and take them to a different level.”

Momager of the stars, Kris Jenner, will also join SKKY as a partner.

Kim may be best known for reality TV, but in recent years she’s proven her business savvy. Kardashian launched Skims, a clothing company valued at about $3 billion after a new fundraising campaign earlier this year.

Here’s hoping there’s a Kim Takes Wall Street reality spinoff in our future.


HR (HR) and DocuSign (DOCUMENT) declare your winnings after the bell.

Also today →

▸ Fed Chairman Jerome Powell speaks at the Cato Institute at 9:10 a.m. ET.

▸ European Central Bank rate decision.

Coming tomorrow: China inflation figures are out; the EU meets on the energy crisis; Hooks (KR) brings income.

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