US Dollar Strength Implications for Global Economies

Economics / Global Economy Nov 06, 2022 - 10:08 PM GMT

US Dollar Big Picture

Ultimately the fate of the dollar bull market is to spike in a blow off top and then collapse in spectacular style, probably at a faster pace then it is currently going higher.

Now don't take this chart as a literal trend forecast as I don't have the time to undertake such a study right now but it is a rough picture of what I have in mind of how the dollar trend could play out. There will be plenty of time to define a forecast trend pattern over the coming years.

What does this suggest for US stocks ?

1. A falling dollar is bullish for stocks

2. A rising dollar is bullish for stocks

3. A rapidly changing dollar is bearish for stocks.

Currently we have a rapidly changing dollar, the stock market prefers the dollar to trade within a range which implies the next few years are going to be tough for the indices. So definitely seek to avoid index ETF's and such like. The less volatile the dollar the better for stocks, Which given the fact I expect the dollar to be volatile then that suggests it's going to be tough to see the indices soaring higher. It does look very similar to the dot com bust, of course it's not going to repeat but rhyme in some manner. It all depends on how orderly the decent of the dollar will be, history suggests it is going to be disorderly.

The dollar therefore suggests that the next few years are going to be tough for the general stock market indices to some degree, subdued, it's not going to be business as usual. we are in for something different, maybe somewhere in between that of the 2000's sideways trend and the raging bull market of the 2010's.

US Dollar Strength Implications for Global Economies

A strong dollar is bad for the global economy because for the USD to rise then demand for dollars exceeds supply, and the USD is the lifeblood of the global economy, probably the best measure is reserves as a percentage of GDP. The higher the percentage the more robust the nation is.

Reverses as a percent of GDP of Major Nations, US

United States: $20.89 trillion - Does not matter because the US can PRINT DOLLARS!
China: $14.72 trillion - 22.8%
Japan: $5.06 trillion - 27%
Germany: $3.85 trillion - 5.6%
United Kingdom: $2.67 trillion - 7%
India: $2.66 trillion - 17.5%
France: $2.63 trillion - 6%
Italy: $1.89 trillion - 7.9%
Canada: $1.64 trillion - 5%
South Korea: $1.63 trillion - 25%
Russia: $1.48 trillion - 34% - US froze a large chunk of Russia's reserves
Brazil: $1.44 trillion - 19%
Australia: $1.32 trillion - 3.3%
Spain: $1.28 trillion - 5.2%
Indonesia: $1.05 trillion - 12.6%

Notable mention - Switzerland and Hong Kong 120%, Saudi Arabia 64%.

The lower the reserves the more financial power the US wields over a nation, for instance before Sri Lanka went bankrupt their reserves were 8.5% of GDP, which implies the US holds most western nations literally by the balls with only Switzerland able to chart it's own financial course. And then there is the EURODOLLAR market, which is the beyond the scope of this article to cover.

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By Nadeem Walayat

http://www.marketoracle.co.uk

Nadeem Walayat has over 30 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

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