The Surging U.S. Dollar – Good For Some, Bad For Others by Gary D. Halbert

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
March 17, 2015

IN THIS ISSUE:

  1. Wall Street Journal Survey of 63 Economic Forecasters
  2. Wholesale Prices & Consumer Spending Turn Lower
  3. Is the Surging U.S. Dollar Good or Bad For the Economy?
  4. How the Stronger Dollar Affects the US Economy
  5. Strong Dollar is Driven by Increasing Foreign Devaluations
  6. Soaring US Dollar Roils Stock Markets This Year
  7. Why I Would Reduce or Hedge Equity Exposure Now

Overview

The U.S. Dollar has been surging against most other currencies over the last year. The question is, is the rising US dollar good for the economy and the investment markets, or not? No doubt, the rising dollar has been buffeting the US equity and bond markets this year and is increasingly cited as the main culprit. That is what we will delve into today.

Opinions differ whether a rising dollar is a net positive, or a net negative, for the US economy going forward. But as I will point out below, the strong U.S. dollar is a good thing, despite what others may say. However, the main reasons why the dollar is surging may surprise you.

The U.S. Dollar has risen about 33% from its low in April 2007. The euro is approaching a new low relative to the US dollar, reaching $1.05 last week, the lowest level since 2003. The euro could be at parity with the US dollar, or even less, very soon. But what does that mean for most Americans? We will answer that question today.

At the end of today’s letter, I will recommend that investors reduce exposure to equities or hedge long positions due to rising financial risks around the globe, which are reflected in the soaring U.S. Dollar . Be sure to read my analysis below.

Before we get into that discussion, let’s look at some recent economic reports and data. We start with the results of the latest Wall Street Journal survey of over 60 economic forecasters. Next, we look at the wholesale price index which has now declined for the last four months. And then we look at retail sales which have declined for the last three months, well below expectations. Let’s get started.

Wall Street Journal Survey of 63 Economic Forecasters

The WSJ just completed its March survey of over 60 economic forecasters, and the results were a bit disappointing.  The forecasters, on average, expect the surging U.S. Dollar and global weakness elsewhere will keep the economy slightly below 3% growth for all of 2015.

The survey respondents forecast 1Q GDP growth of only 2.3%, not much better than the 2.2% in the 4Q of last year. They think the economy will grow by 3.0% in the 2Q but by only 2.9% for all of 2015, versus 2.4% in 2014. They expect the unemployment rate to fall from 5.5% currently to 5.1% by the end of this year.

On the question of when the first Fed rate hike will occur, over 80% believe it will come at either the June FOMC meeting or the September meeting – no surprise there. Almost two-thirds believe the Fed should raise the rate sooner rather than later. That seems very odd given that inflation is nowhere to be found.

Wholesale Prices Decline Fourth Straight Month

The Producer Price Index, which measures prices that businesses receive for their goods and services, declined by a seasonally adjusted 0.5% last month from January, the Labor Department reported last Friday. That marked the fourth straight monthly decline.

The so-called “core” PPI – excluding the volatile food and energy categories – fell 0.5% in February. Economists surveyed by The Wall Street Journal had expected prices would increase 0.3% and core prices would rise 0.1% last month. In January, the US saw its first year-over-year dip in overall consumer prices in more than five years, when the Labor Department’s Consumer Price Index fell 0.1% from a year earlier.

As I will discuss below, the stronger U.S. Dollar is suppressing inflation. Generally speaking, a rising dollar makes our imports cheaper and our exports more expensive for foreign buyers. Prices for imports outside of food and energy dipped 0.1% in February, and exports fell by 0.8% over the same period.

Consumer Spending/Retail Sales Turn Lower

To the surprise of just about everyone, consumer spending turned lower in December and January. Personal Consumption Expenditures (PCE) – the Fed’s favorite measure of how consumers are feeling – unexpectedly fell in January for the second consecutive month, and perhaps a third when we get the numbers for February.

Retail sales, for which we already have the February numbers, fell for the third month in a row. Retail sales fell 0.6% in February, 0.8% in January and 0.9% in December – all of which were considerably worse than expected.

U.S. Dollar

After last year’s spectacular plunge in oil and gasoline prices, many analysts assumed that consumers would spend all of their gasoline savings on other things. Some overlooked the fact that even if you spend all your gas savings on other things, that still amounts to the same amount of spending.

Yet in reality, Americans on average did not spend all their gasoline savings on other things. Knowing there’s no guarantee that gas prices won’t go right back up again soon, many Americans have elected to sock away some of their gas savings, rather than spend it all. The US savings rate rose to 5.5% in January, the highest level since early 2013.

This explains why consumer spending fell in December and January (and likely February) and retail sales were down for the last three months, despite sharply lower gas prices.

Is the Surging U.S. Dollar Good or Bad For the Economy?

The US dollar has been trending higher since the bottom in early 2011. Since then, the dollar has gained apprx. 33% against a basket of major currencies. The ICE Dollar Index (DXY), a measure of the U.S. Dollar against six major currency rivals, is up over 9% this year alone to trade at its highest level since late 2003.

The fact that the US dollar is now higher than at any time in over a decade is attributed to various factors. Among them is the fact that the US economy is the strongest among developed nations, even though the recovery remains rather feeble. As the old saying goes, the US dollar just happens to be the best horse in the glue factory.

Another is the fact that rivals such as Japan and Europe are undertaking monetary policies (QE) that purposely undermine their currencies in misguided efforts to stimulate their economies. The euro, for example, fell to US$1.05 last week, down 12.4% this year alone and down 24% over the last 12 months.

U.S. Dollar

If this trend continues, and it appears it will, the euro could fall below parity with the US dollar this year for the first time since 2002. Some analysts believe the euro is headed as low as 85 cents to the dollar before long. The Japanese yen is in even worse shape relative to the dollar.

Another factor buoying the dollar is the fact that the US Fed is widely expected to raise short-term interest rates this year. Higher interest

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