Rising Dollar Intensifying Inflation

Macro Perspectives: Thu 28 Apr 22

We talked yesterday about the warning signals in the currency markets - the euro may have officially joined the tumult.

We came into last weekend's French election with risk of a crumbling of the euro, and a sovereign debt crisis in Europe, if Le Pen would have won (the anti-globalization, anti-EU candidate). She lost. Yet the euro has done this...

The dotted line in the chart represents the trend from the inception of the euro in 1999. The line has broken.

The euro has now lost 7% against the dollar, since the beginning of the year, and a sharper decline looks to be in the early stages.

The yen has lost 12% in a little more than a month. Almost every currency (except the Brazilian real) has lost, and continues to lose, meaningful value against the dollar.

Here's where this gets very interesting…

Through much of the past two years (the pandemic period), the change in the relative value of currencies has been very mild, if not uneventful. Meanwhile, the massive global policy response to covid created devaluations in paper currencies (collectively) against pretty much everything (goods, services, hard assets, financial assets...everything).

As we know, this translates into "inflation," which on its own, is lowering the global standard of living. That's about to intensify.

Consider this: The dollar index (the dollar measured against a basket of major currencies) is up 14% from this time last year. The price of oil is up 69% during the same period. Guess what oil is priced in? Dollars.

Guess what else is priced in dollars? Pretty much every other important commodity in the world (food, energy, metals).

This is why the value of the dollar tends to have an inverse relationship with the price of commodities. That inverse correlation gives stability to global buying power - that relationship has broken down in this current environment. The rising dollar, coinciding with rising commodities prices, is destroying the affordability of necessities across the world.

Last month we talked about a "coming food crisis" (you can review that note by clicking here).  This is a formula for it.