I haven’t ranted about the dollar much since it finally hit that former all-time “weakness peak” of 1.3666 (or, as we like to say, a buck-thirty plus the devil) back at the end of April. The new all-time high (remember, on this chart, as the bars go up, the dollar is weakening) was set on April 26 at 1.3681.
What I want to note is the correlation between the value of the dollar and bond yields. The dollar’s strongest point recently, which was just below 1.33 dollars/euro, was hit in mid-June, just as the TNX (10-year bond yield) was topping up around 5.30%.
That’s no coincidence. Typically, as bond yields rise, dollars become “more attractive” as an investment, and their value is boosted.
What I want to note is the technical setup here. The TNX has peaked and retraced back down to 5 percent, coinciding with the dollar retracing back up to 1.36 dollars/euro.
These charts look to me like we may be near a resumption of the trend towards a strengthening dollar and a higher bond yield. What would that spell for the stock market? Stockey Markey Down, that’s what.
China’s Yuan-derful Manipulation
In addition, remember that there is still the Elephant in the Corner in the form of China, which has been responsible for much of the artificial strength of the dollar in the young 21st century. If they weren’t short-circuiting the normal cycle of currency value fluctuation which accompanies trade surpluses/deficits, the market would have adjusted for our spendthrift penchant for Chinese goods by now and we would have seen a weakening dollar and strengthening yuan until the imbalance self-corrected.
Instead, the Chinese government has kept currency revaluation from correcting the trade imbalance by using their dollar surpluses to purchase U.S. Treasuries rather than exchange them for the local currency. This has resulted in an artificially strong dollar and an artificially low bond yield, and explains much of what has happened in those markets recently. For example, how did the 10-year note yield manage to stay so low through, oh, over 4 percent of short-end raising by the Fed? Answer: China.
And here is where I get to link to my Photoshop doodle from last September which is a visual representation of the China phenomenon. Makes my version of what is going on a little clearer. At least it did for me.
And your point is what?
My point is, don’t forget that we could at any time be faced with the “worst of all possible worlds”… slow growth or recession over here, a weakening dollar, and paradoxically rising bond yields (and mortgage rates!) all at the same time, which could turn into a death spiral for our economy. All it would take would be for China to start selling their trillion dollars or so worth of U.S. Treasuries. So as I always say, Chuckie Schumer et al, I agree that China shouldn’t be manipulating the currency balance in order to keep our country hemorrhaging dollars into their system. However, we’re too far down the rabbit hole now, so don’t insist that they do anything about it too quickly.
