What's Up With the Down Dollar?

I’m interrupting this week’s planned article on HSA’s (Health Savings Accounts) to talk a bit about what has been going on with the US Dollar (dollar).  The dollar has been moving down the past year, but some comments out of the administration brought a bit of extra attention this week.  There are pros and cons with a strong or weak dollar and I figured I would hit some of the highlights.

In case you missed it, the dollar is down more than 10% this past year.  This issue came to more prominence when the Treasury Secretary Mnuchin commented a weak US dollar is good for trade, which is true, but maybe something he should not have said.  Past Secretaries have usually commented in the need to have a strong dollar.  His comment last week helped to fuel another 2% drop in the dollar. 

As a reminder, when the dollar is worth less it costs more for you to buy goods from outside the US.  One example I read was it will cost more for you to buy a shirt made in China sold at Walmart.  On the flip side, it becomes more beneficial for shirt makers in the US.  This extends beyond the US as a weaker dollar makes products made in the US more affordable on the world market increasing their demand.  This certainly plays into the “America First” philosophy.

The flip side is true too.  A stronger US dollar typically leads to an increase in imports as our dollars can buy more from outside the US.  What is interesting is the US trade deficit continues to rise as the dollar loses value.  A trade deficit is when we import more than we export.  The trade deficit for November was the largest in six years.  A rising trade deficit can reduce economic growth though.

Let’s jump back to a weak dollar making US products more competitive.  This is true.  It is also true it can lead to inflation, especially as it comes to rising commodity prices and imports.  Rising inflation can lead to the Fed raising interest rates.  While those of you complaining about your CD rates paying nothing may appreciate that, higher rates hurt when it comes to paying back debt, like the US Government has quite a bit of. 

Not only is what we are paying in debt important, but so is investing in debt.  The yields on US fixed income have been rising.  As yield is inverse to price, this means the price of US debt has been dropping due to lower demand.  Investors, and we are focused on institutional-sized ones who really drive the market, are looking for countries with stronger currencies and relatively stable bond yields.  In case you haven’t noticed, some of the best fixed income performers have included emerging market debt.

Let’s go back to what brought this issue to the forefront – the Treasury Secretary’s comment about a weak dollar.  While he may have not meant much about the overarching policy of the US dollar, his lack of clarity (he had a chance to clarify and he kind of flubbed it) and timing was bad.  It happened the same week the US put tariffs on solar panels and washing machines.  When you step back and look at the big picture of the “America First” campaign, the increased use of tariffs and the Treasury Secretary’s comments about a weak dollar could lead to other countries doing the same, which would not be good for anyone.  It was important enough it led to the President commenting he preferred a stronger dollar and implied the market should determine the strength or weakness of a country’s currency.  Amazingly, I agree with this comment.

The relative strength of the dollar may not seem that important, but it has a tremendous impact on the overall health of the US economy and the market too.  While you may want to know what Bitcoin and other hot stocks are doing, don’t forget what is happening with the quiet guy in the corner – the US dollar.  Eventually something will derail the bull market we have been enjoying for so long.  Let’s just hope we cannot point to this time as being the start of it.