John Rubino: The (Suddenly Weak) Dollar Is Back In The Spotlight

John shows the downside to a weak dollar is the resulting bond market carnage, but there’s an upside. Here’s the details…

by John Rubino of Dollar Collapse

For the past few years the “strong dollar” has been so central to the global financial story – enabling ever-lower interest rates and ever-higher financial asset prices pretty much everywhere – that it’s easy to forget how illusory “strength” is for fiat currencies.

Since mid-2017 that illusion has been evaporating, as the dollar falls (both against other fiat currencies and assets like oil, bitcoin, tech stocks and gold) and interest rates rise.

And this week the US seemed to welcome these trends.

Mnuchin comment surprises financial markets, turns dollar decline into ‘one-way bet’

(CNBC) – The dollar, already on a spiral lower, sank to a three-year low after Treasury Secretary Steven Mnuchin said a weaker dollar was good for U.S. trade.

The comments depart from the strong dollar policy of Treasury secretaries before him, going back to Robert Rubin in the Clinton administration, but fit with the Trump administration’s “America first” message.

The weak dollar policy could backfire and make U.S. assets like Treasurys less appealing, and drive up the costs of foreign goods for businesses and everyday Americans.

“They basically open this up as a one-way bet for traders, and traders will keep pushing it and keep pushing it,” said one strategist.

Mnuchin’s comments echo statements by President Donald Trump, who famously helped turn a market trend of a stronger dollar last January when he said, prior to his inauguration, that the dollar was “too strong” and that U.S. companies can’t compete because of it, particularly against the Chinese. The dollar index has lost more than 10 percent since then, and after Mnuchin’s comment Wednesday morning, it sank to a new three-year low.

“Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin told reporters in Davos, according to Bloomberg, adding that the currency’s short-term value is “not a concern of ours at all.”

Whether a weak dollar policy was the intended message or not, the fact that Mnuchin made the comments at a briefing at the World Economic Forum’s annual meeting in Davos, Switzerland, was not lost on the market. The forum is viewed as the bastion of globalization and free trade, while Trump officials have been or are expected to reaffirm the administration’s America first policies, seen as protectionist by some.

The dollar was already set on a downward course this year, and Mnuchin’s comments help cement that path. The euro rose to 1.23 per dollar, and yen gained about 0.8 percent Wednesday against the greenback.

Treasury Department data show that China and Japan, the two largest holders of U.S. Treasurys, reduced their holdings in November as the dollar weakened. Last month, the International Monetary Fund reported the dollar’s share of global currency reserves fell in the third quarter to 63.5 percent, its smallest since mid-2014.

What are the downsides of a weak global reserve currency? Bond market carnage for one:

Ray Dalio Says Bond Bear Market Has Begun, Expects Historic Crash

(Zero Hedge) – Joining the likes of Bill Gross and Jeffrey Gundlach, and echoing his ominous crash warning to the NY Fed from October 2016, Bridgewater’s billionaire founder and CEO Ray Dalio told Bloomberg TV that the bond market has “slipped into a bear phase” and warned that a rise in yields could spark the biggest crisis for fixed-income investors in almost 40 years.“A 1 percent rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981,” Bridgewater Associates founder Dalio said in a Bloomberg TV interview in Davos on Wednesday. We’re in a bear market, he said.

However, as we explained last December, this is a low-ball estimate which “understates the potential losses” as it “does not include high-yield bonds, fixed-rate mortgages, and fixed-income derivatives”, which would suggest that the real number is likely more than double the estimated when taking into account all duration products. As a reminder, Goldman calculated the entire duration universe at $40 trillion as of the summer of 2016, resulting in $2.4 trillion in losses for a 1% move.

By now the number is far, far greater.

Gold, of course, loves this kind of thing:

Gold hits 4-month peak after US welcomes weaker dollar

(CNBC) – Gold prices hit the highest in more than four months on Wednesday after a U.S. official welcomed a weaker dollar and investors sought insurance against uncertainty.

The dollar index touched fresh three-year lows after U.S. Treasury Secretary Steven Mnuchin said a softer dollar was good for the United States. A decline in the dollar makes commodities priced in the greenback cheaper for buyers using other currencies.

Spot gold was up 0.95 percent at $1,353.80 per ounce at 12:02 p.m. EST, while U.S. gold futures for February delivery climbed 1.23 percent to $1,353.20 per ounce.

“It’s the weaker dollar, it’s the inflation focus and it’s also to some extent the market is continuing to look for a hedge against a world that’s becoming incredibly complacent with stocks at record highs,” said Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen. “We’re honing in on the 2017 high around $1,357, which is going to be the next big level.”

“Global investors are also concerned about potential trade wars… which is stirring up some risk-aversion trade, so that, in turn, is supporting gold,” said Richard Xu, a fund manager at China’s biggest gold exchange-traded fund, HuaAn Gold. “I think gold prices will continue to trend higher along with other commodities, so $1,400 (an ounce) is our near-term target.”

In other precious metals, silver gained 2.14 percent to $17.41 per ounce after touching a 3-1/2-week low of $16.73 in the previous session.