U.S. stock markets are all down YTD. Gold is also down YTD after the latest downturn. Inflation concerns, recession fears, and most importantly, global equity markets have wiped out $11 trillion in assets over the last 5 weeks. Not an easy environment for investors who need to keep a cool head, especially at this time. Experienced investors have already anticipated this and are preparing for a possible stock market crash. They are doing this primarily through safe-havens, and when many think of safe havens, the U.S. dollar immediately comes to mind. The second most popular currency among currency traders, it was one of the few assets to gain a decent 9% or so last year. The S&P, by comparison, has lost 15% and gold is down 0.12%.
Although the dollar has risen since the beginning of the year, it received a further boost from the Fed’s latest interest rate hike. The increase in interest rates strengthens the dollar, even though this is often misunderstood. The dollar, or rather the dollar index USDX, is measured in a basket with other currencies. That is, if the dollar index rises, it only means that the other currencies are weakening. Now, again, the U.S. dollar is measured primarily against the euro, and it’s not hard to see that the euro is doing anything but well at the moment. Loose monetary policy with an overwhelmed ECB president, recession worries, and also the war in Ukraine with a real explosion in energy prices are weighing heavily on the euro. These are all real problems, so it’s no wonder that the US dollar index is doing well at the moment.
The signal from the Fed’s rate hikes should also have reached the ECB that inflation is probably a more serious problem than originally thought. At the moment, however, the same tape that has been running for two years continues to be played. So a lot of talks and little movement, thoughts should be confused and focused on the next thing. What could be the next thing? Possibly an escalation in Ukraine, or that the EU economy really experiences an energy crisis. All possible scenarios, and possibly events that further bolster the USDX as a perceived safe haven.
The U.S. dollar as a safe haven with inflationary properties. The Fed’s loose monetary policy has caused inflation in the U.S. to rise as sharply as it last did 40 years ago. Therefore, it should not be forgotten that the supposed safe haven is still under the control of the Fed, which has not been able to crash the markets in recent years. It will now be exciting to see whether the Fed comes to Wall Street’s rescue again, which in turn means that the supposed safe haven will lose even more value.