Why Is The US Dollar Rising?

Tyler Durden's picture

Submitted by Charles Hugh-Smith via OfTwoMinds blog,

So where will mobile capital flow in an environment of rising socio-political risk, a multi-year USD uptrend and a dearth of safe, liquid markets?

On October 3rd I asked Is the U.S. Dollar Set to Soar? It seems the answer was yes. Here's the weekly chart of the USD I posted on October 3rd:

And here's the current weekly chart of the USD:

Note the apparent breakout above 100 and the constructive similarities to the 2014 breakout that was followed by a 20% increase in the purchasing power of the USD relative to other currencies.

This begs the question: could the US dollar be starting another extended leg higher that would eventually take it to 120, a 20% gain from its current level?

This raises a further question--why shouldn't the USD rise another 20%? Longtime readers are all too familiar with my many essays on the US dollar over the past four years, and so they shouldn't be surprised that the USD is moving higher.

While I have great respect for the analytic skills of the many dollar bears who have expected the USD to decline or collapse, we all have to respect the market's movement. In the case of currencies (which trade in the trillions of dollars daily), it's difficult to make a persuasive case that currency trends are driven by central bank interventions.

Policies such as interest rates and bond-buying, yes--intervention, not likely. The currency markets trade the entire Federal Reserve balance sheet--roughly $4 trillion--every two days.

So we have to look beyond manipulation for explanations of the USD's uptrend. The conventional view--which I have shared--is that the trend toward higher yields in the U.S. acts as a magnet for capital in a zero or negative-yield global economy.

The other dynamic that have been widely covered is the demand for USD to pay loans denominated in dollars.

While these explanations make sense, they don't tell the whole story.

Let's start with the foundation of currency supply and demand: capital flows.

The key characteristic of financial capital is its mobility. Mines and farmland are immobile, factories are costly and time-consuming to move, and labor is only mobile on the margins: the majority of the workforce is anchored by family, language and familiarity to their country or region of origin.

Moving to a new locale and new type of work is costly in terms of time, money and effort, and fraught with risks.

Now compare the ease of moving electronic money around the world. A few clicks and a few seconds are all that's needed.

The story of the financialization and globalization of the planet's economy is ultimately a story of easing the flow of capital. The neoliberal philosophy places a premium on easing capital flows in and out of any market, and turning every corner of the world into a market that is accessible to mobile capital.

As Marx foresaw, this removal of obstructions to the movement of finance capital has elevated finance capital to the dominant form of capital: industrial capital is no match in mobility and thus in profitability.

China is a good example of this. Chinese manufacturers typically operate on razor-thin margins, and many state-owned enterprises lose money and are only kept afloat by subsidies or state-bank-issued loans that are forms of state subsidies.

The big money being made in China is financial, not industrial. This story is repeated everywhere that capital has mobility. In emerging markets, hot money flooded in when the USD was in a downtrend, inflating bubbles in local real estate, stock markets and commodities as finance capital reaped the profits from rising emerging market currencies.

When the USD trend reversed, mobile capital cashed out and left the emerging markets in a digital flood tide. The mobile-capital driven bubbles in currencies, stocks, real estate and commodities all deflated, devastating markets and the social structures that depend on markets' expansion.

The global rise of populism is raising doubts about the stability of a status quo that has greatly enriched the few at the expense of the many. This rising wealth/income inequality is the result of mobile capital's ascendance to supremacy in profitability and political influence.

So where will mobile capital flow in an environment of rising socio-political risk, a multi-year USD uptrend and a dearth of safe, liquid markets? To answer, put yourself in the shoes of a manager responsible for $10 billion. You want to gamble billions in this environment on bat guano futures or hotel developments denominated in illiquid currencies?

Or would you rather buy USD-denominated assets that will gain in value regardless of their yield as the USD marches higher, and be able to sleep at night?

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VWAndy's picture

 Why is the US $ rising?  Everyone is printing faster?

Stan Smith's picture

+1 and then some.

Boom goes the Dynamite.

Stuck on Zero's picture

If the Trump is going to repatriate manufacturing and balance the trade deficit where would you put your money?

Dark Daze's picture
Dark Daze (not verified) Stuck on Zero Nov 26, 2016 5:20 PM

So, let me get this straight. You want all the capital and all the control to go back to you, now that Trump is in. Well, the trouble is this little item called debt, and how much more of it you are going to have to create to achieve what you need to do. The cost is going to be high, but as long as the US dollar continues to rise, the true costs go down, but only if you buy foreign.

manofthenorth's picture

Why is the Dollar rising ??

Stockholm syndrome.

francis scott falseflag's picture

 

misconceived   "FLIGHT TO SAFETY'   

Escrava Isaura's picture

Stuck on Zero: If the Trump is going to repatriate manufacturing and balance the trade deficit where would you put your money?

Ohh boy, you’re intoxicated by the Kool-Aid. Trump will have to create 9 million (shitty) manufacturing jobs to go back to 1980 number. And Trump will need to find 9 million barrels of oil a day before he could even think in how to balance the trade. You tell us the odds that either will happen. I give it a zero chance.

Gee wizz. Is this the best Charles can do? The big money being made in China is financial, not industrial. 

Daah. And it will only gets worse from here because China’s oil peaked on July, 2015. US oil peaked in 1971, that’s when the financials took over the US economy; make that the world. Another very telling example is Britain:

There has been a marked postwar shift in economic power from manufacturing to services. In 1948, British industry (including manufacturing, oil and gas extraction, and utilities) accounted for 41% of the British economy. By 2013, it was just 14%.

Financial services are a key part of UK exports. Britain has the highest ratio of services exports to GDP in the G7, at 13%. It also has the biggest share of financial services exports by some way, at 29% in 2012. The second is the US at 15%, with Japan exporting the least at 3%.

https://www.theguardian.com/business/economics-blog/2014/apr/24/uk-economy-seven-things-need-to-know-ons-g7

 

 

OpenThePodBayDoorHAL's picture

China, India, and emerging are the last vestiges of "growth" and they are getting absolutely crushed by the USD. So Mr. Yellen will have to think twice before this famous head fake "higher rates" (to the extent he/she can control rates that is). But finance capital should continue to triumph over industrial capital so it may happen anyway.

As far as the famous 9m manufacturing jobs, America does not have the skills or the desire to assemble iPhones, take a look at the factories in China that do this today and ask yourself whether you could even find enough fat whiny drug-addled 'Merkans to fill one shift.

What Trump could do is repatriate the troops from places like Germany and hand them shovels and tell them to start digging (roads, bridges, airports). This will crush local economies in places like Germany and Korea but also Kazakhstan and all the other 110 countries where we prop up the local economy with services to military bases. The extended Marshall Plan nobody talks about.

The beatings will continue until morale improves, the currency wars will gain steam, these geniuses all have the idea to make their countries richer by making their citizens poorer. None can see that debt-based money eventually reaches this point, where everything that can take on debt is already stuffed to the gills with it, all the demand is pulled from the future to the present (and then is past), and the only way you can continue to pretend solvency is for Mario Draghi to buy CCC-rated junk. The very function of extending credit (underwriting) is cancelled so the only eventual outcome is a gigantic Jubilee, either planned or involuntary.

Muad'Grumps's picture

The Central Banks are no longer calling the shots. This is out of their hands. The markets are raising rates. The Fed will only tag along.

Antifaschistische's picture

nailed it....anyone who think we can just "bring home our jobs" from China has never seen a large scale Chinese operation.   It's not a "skills" issue.  Even my friends here in Houston who graduated from Beijing Normal University will brag about a unique Chinese skill that they claim even they have....which is to sit for 10-12 hours a day to highly repetitive tasks..(note) without having any emotional breakdown.  They claim it is a genetic trait that they can observe in their own children.

oh...and, ps...they will do this for a 1/3rd of our minimum wage...and they get no benefits.

so...if we are going to bring home the jobs, we should not start with iphones.  How about something we know, we know Americans can do.  How about staplers?  How about knives?  Why do all my good knives have to come from Germany or Japan (I love expensive knives).  How hard can it be to make a damn knife! (no offense intenced to the ancient arts)

To me, it just doesn't start with manufacturing.  It starts with the mentality of the American who for the past 40 years has left quality on the shelf, because sitting a shelf below was something 20% cheaper, that had 50% of the useful life....until...one day when the top shelf products just disappeared.  Now, everything has 20% of the useful life of the "good ole stuff" we had before.

justdues's picture

My "Buck" knife comes from America , love it , life time guarantee from a Christian company

Escrava Isaura's picture

The British and American control almost half of the world GDP through financials so if the US maintain its hegemonic power, BIG if, especially with Trump in charge, the US Central Bank can control rates, to a large extent.

Here’s the thing: Trump won’t repatriate any troops, unless it is needed to protect him over here. Trump will also realized that things (jobs and financial deterioration) will start happening much faster, such as that the people that voted for him will become poorer as private sector takes even larger shares (tool-booths) of public sector. Also, Trump’s tax-cuts will widen the gap.

There won’t be a “meaningful” debt Jubilee. Some but not enough, because the elites know that the (energy) pie is getting smaller.

As soon as Trump base realized that Trump is not delivering, the only way left for Trump is a war-economy, where profit is not the goal but jobs. Not sure what Trump will do here, but if I had to guess, Trump will go with the elites, meaning, forget the jobs because it’s too late; so, the citizens, more and more, will keep getting poorer.

US won’t leave Germany (Europe), Korea, or any other key-location. The contrary will be happening, while the propaganda will tell the population (his base) otherwise.

The beating of the “dirty-nasty” people will continue by the elites (shadow private-sector labeled as shadow-government). The best that the general population can hope for, because of some regulations be removed, is if they get, say, 6 million barrels of shale and some anthracite coal hidden somewhere. Good luck to them finding it.

And my final point: Our economic and jobs problems dwarf when compared to our real problem. Our real problem is a growing demographic in a not growing planet. And the energy that we had, and that we still have some, was an anomaly, meaning, once it’s gone, humans will be living just like all hte other species, in constant struggle to get something to eat and drink.

 

Correction, because accuracy is important when talking numbers: US lost 7,231,000--or 37 percent--since employment in manufacturing peaked in the United States in 1979.

http://www.cnsnews.com/news/article/terence-p-jeffrey/7231000-lost-jobs-manufacturing-employment-down-37-1979-peak

 

francis scott falseflag's picture

 

Your affable theory depends on whether Trump turns politician or stays ...er, well, Trump

post turtle saver's picture

pro tip... Hubbert's trend for the US peak was broken toward the upside in 1993 and current production levels are approaching the 1971 "peak" number... as it stands, the US is currently the #1 producer for petroleum & natural gas (overtaking Russia for that honor in 2015)...

 

francis scott falseflag's picture

Nobody cares about gas.
Tell us how long the US will out produce Mother Russia in crude oil.
What does your crystal ball say?

Escrava Isaura's picture

It’s not what the “dirty-nasty" Russians produces, it’s what the Russia’s elite consumes.

 

francis scott falseflag's picture

production no longer equals consumption.   production now equals consumption plus storage.

 

have you any idea how much production has been stored in the last 10 years?  

 

the high production figures gives heart to the economists who think everything is fine

francis scott falseflag's picture

 

Not only what the Russia's elite consume, but

 

The top export destinations of Russian oil are China ($39.3B), the Netherlands($39B), Germany ($29.8B), Italy ($22.9B) and Japan ($21.5B). 

post turtle saver's picture

look folks... the trend was broken in 1993 for _crude oil production_ and _crude oil production_ in the US is currently approaching the 1971 "peak"... so much for 1971 being the End Days Apocalypse for crude oil production in the US, Hubbert was W R O N G...

if you add natural gas to the picture, production has increased further still for _hydrocarbons_ which can be cracked and catalysed into anything a modern refinery wants them to be (which, by the way, the US holds the #1 position for as well - refinery capacity)...

the squid ink that the dumbass from Brazil threw into the water is utterly meaningless and doesn't address the fact that the basic premise for his/her argument is wrong... you know, "wrong", the opposite of "right"...

"nobody cares about gas" - good lord you're fucking dumb, the billions upon billions that have been spent to create LNG trains across the world say otherwise... idiot

francis scott falseflag's picture

Turtle  .

"Data from the United States Energy Information Administration show that world production leveled out in 2004, and an October 2007 retrospective report by the Energy Watch Group concluded that this data showed the peak of conventional oil production in the third quarter of 2006.[26]"

 

"Sadad Al Husseini, former head of Saudi Aramco's production and exploration, stated in an October 29, 2007 interview that oil production had likely already reached its peak in 2006."

 

 

"How much oil does the US produce each year? In June 2015, the United States produced an average of about 9.3 million barrels of crude oil per day, about 4.1 million barrels per day of other noncrude petroleum liquids...
All of these predictions about the arrival of 'global peak oil' were made before the arrival of the 'Greenspan Neverending Recession' and the mobilization of hundreds of thousand gas guzzling jets and tanks and non nuclear naval craft in the phony build up for the phony war with Russia.   When the last storage tank recieves the last drop of crude oil, production will start to decline again.  Unless Trump is forced to go to war.  You are correct  with the addition shale oil, US production achieves the high it made in 1971. WITH THE ADDITION OF SHALE>  Of course, the shale producers wisely chose the easiest to drill sites, conveniently located near transportation.  Future shale oil won't be as cost friendly. Natural gas is wonderful for keeping your domicile toasty but not for driving your tanks and non-nuclear air craft carriers When I said "Nobody cares about gas,"  I thought you would understand that was was being melodramatic  and give me the ZH pass.  You hurt my feelings.  :o(


Escrava Isaura's picture

First: Dr. M. King Hubbert, one of the top American scientists of all times, is a "career theorist" (note the populist anti-science tone of this phrase). Since no one needs to pay attention to what a career theorist says or writes, it apparently escaped Mr.Basenese that Dr. Hubbert correctly predicted in 1956 that the U.S. production would peak in the early 1970s. It did. And later, oil production peaked in the North Sea in Norway.

In addition, Dr. Hubbert predicted that the world production of petroleum would peak in the early 2000s. And it did too.

Second: Condensate liquid is not oil.

http://www.fluidynenz.250x.com/aug10/condensate.html

 

post turtle saver's picture

all that stuff is ancient history, the current US production numbers for crude oil in the US clearly demonstrate that Hubbert was wrong... innovation in the industry is not static and the various reserve numbers are constantly in flux... these are fundamental blind spots for all who pray at the Hubbert altar...

Oilwatcher's picture

Largest US oil field ever (current est. 20 billion barrels) just confirmed in West Texas, and there's lots more in the same area: https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&...

francis scott falseflag's picture

 

Send runners out to all the brothels and casinos in Nevada and tell the shale oilers that new deposits have been found in Texas.

 

Wall Street is now accepting new claims.

francis scott falseflag's picture

 

Find where in Hubbert's work he says 'innovation is static.'

deth's picture

You may have a point, even if it's unlikely, if people believe it it can add momentum.

But I think the main reason the dollar will rise is torrent of them rushing through the dollar isthmus for any treasuries liquidated, e.g. crowded theater tini exit syndrome. The rise will be one of the symptoms of dying.

Dirtnapper's picture

Liquidity issues around the world and the USD is still (for today at least) the world reserve currency?  It's all fine and dandy for those who live in the US, until the other currencies begin collapse and bring down the Derivative Market.  What goes up, must come down.

VWAndy's picture

 Liquidity is the way they control the game. More cash or more debt either way the honest folks get reamed. The cash gets skimmed the debt just gets piled on.

ZH Snob's picture

the USD is still the world's reserve currency, and because of its electronic liquidity, is used as a safe harbor.

 

until it isn't.

VWAndy's picture

 Shh the docks are burning.

Dark Daze's picture
Dark Daze (not verified) ZH Snob Nov 26, 2016 5:18 PM

It is no longer the sole reserve currency. I think you lost that when Nixon nixed gold payments.

And although I admire the bravado, positioning the US dollar, again, as the only go to asset is dangerous from a lot of perspectives.

Muad'Grumps's picture

No, it's because the world wants to delever. The dollar short wants to unwind. Nothing can stop this.

Quantum Bunk's picture

garbage. all garbage theories.

 

its a bubble and will look good on all of you morons

Stan Smith's picture

Because everyone else is even more screwed than us.

debtor of last resort's picture

We know. That's why the dollar will get anussized.

Rabid Bear's picture

I'll take "Is it rigged?" for $200 Alex.

ry3n444's picture

anticipation of rate hike, repatriation in works, euro upcoming calendar, china weakening, no where else to go

silverer's picture

You hit some good ones. How many people have you talked to that come back with the familiar "It will never happen here" (USA), or the sister line: "I'll be gone before that happens."

Lost in translation's picture

"I'll be gone before that happens."

I have a well-educated Econ major friend who used to teach Freshmen Western Civ at a private institution before switching to become a public high school teacher. He uses this line whenever I remind him that his CalSTRS Pension promises can never, ever be delivered upon.

The Bell Rang's picture

Blow off top...........for $500.00

Kenyesian Seasonally-Adjusted Spot Gold's picture

WSJ added another interesting aspect to the dollar strength this past week. If Trump declares a one-time 10% tax on foreign based profits, we're looking at a multi-trillion dollar boon for the dollar in the coming 12-18mo.

Pieter Bruegel the Elder's picture

I will explain it this way: When everything is shit, a polished turd looks like a pearl.

 

Mr T's picture

Thomas Jefferson quote "And I sincerely believe, with you, that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."3

We have both standing armies and central banks I guess they call that progress. 

This next quote has wrongly been attributed to President Jefferson at this time no one knows I will attribute to Tyler Durden 

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered"

Hard assets for fiat, NWO  baby

Joebloinvestor's picture

Simple really.

 

The US election just demonstrated to a fucked up world that it isn't totally corrupt.

 

That is real HOPE, not a fucking sham.

 

The added benefit to gold buyers is a temporary low price maybe going lower.

silverer's picture

We've had a lovely bout of misallocation of capital. Every dollar that was spent in an effort to boost productivity that produced less than a dollar is just another nail in the coffin of the western banking system. This time, smart people will have their money OUT of banks before they self-destruct.

jmack's picture

just let it keep rising til we can get gold at $600 per ounce!

1stepcloser's picture

Strong dollar equals PMs on sale... The Dollar is Strong like BULL.......shit

DannyTX's picture

"put yourself in the shoes of a manager responsible for $10 billion. You want to gamble billions in this environment on bat guano futures or hotel developments denominated in illiquid currencies?

Or would you rather buy USD-denominated assets that will gain in value regardless of their yield as the USD marches higher, and be able to sleep at night?"

The dumbass just said it was an illiquid market.  Do I want to buy in at possibly the top of an illiquid market?--Hell No!!!