Dollar Index Climbs Higher as Europe and Japan’s Economies Collapse
The Dollar Index (DXY) has reached a two-decade high. It may appear the Dollar is strong, but the DXY compares the Dollar to other currencies. The “strength” of the Dollar is an expression of how poorly the other currencies are doing.
What Is the DXY (Dollar Index)?
The DXY, sometimes called the Dixie, is a basket of six currencies weighted against the Dollar. The six currencies are the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc. All the currencies are weighted differently, but overwhelmingly the Euro represents the most significant portion. The Euro represents 57.6% of the DXY. There are no regular rebalances of the portions of the DXY. The last time the percentages were adjusted was in 1999, when the Euro was introduced as a common currency for the European Union. Before that time, there were ten currencies in the DXY. The Euro replaced the West German Mark, French Franc, Italian Lira, Dutch Guilder, and Belgium Franc.
Why Is the Dollar “Strong?”
The Euro is at its lowest exchange since 2002. The Yen has the lowest exchange rate since 1998. The British Pound is at the lowest exchange rate since 1985. These three currencies represent 83.1% of the DXY. These three economies struggle with high inflation, high energy costs, Russian war fallout, and not keeping up with U.S. interest rates. The U.S. economy is also collapsing, but not as fast. The Dollar’s “strength” is the proverbial cleanest shirt in the dirty hamper analogy.
What’s Going in the Eurozone and U.K.?
The primary issue in Europe is unbelievable energy costs and higher inflation than in the U.S. After the Russian invasion of Ukraine, many European nations committed a predictable and painful economic suicide by sanctioning Russian oil and natural gas. Since the Russian invasion of Ukraine, the price Europeans are paying for natural gas has skyrocketed. The current price Europeans are paying would be equivalent to $410 barrels of oil. In the U.K., it is estimated the average household will have to pay between £3,500 to £6,000 ($4,034-$6,915) more per year for power bills. The mean average salary of full-time workers in the U.K. is £38,131.
Germany is Europe’s largest economy and was 63.7% dependent on Russian oil for energy. Germany’s PPI (Producer Price Index) is up an astronomical 37.2% from July 2021. Russia has repeatedly stopped flow through the Nord Stream 1 pipeline, citing maintenance issues. 41.1% percent of European natural gas comes from the Nord Stream 1 pipelines. Many Western leaders claim Russia is using energy as a weapon of war.
No matter how you feel about the war in Ukraine, Russian actions cutting off European energy seem logical. What did the global community expect Russia to do when it collectively took deliberate actions to crush Russia’s economy? Did they think Russia would play nice and help keep the other economies strong as their own was attacked? Russia isn’t called a “bear” because they are a cute and cuddly baby panda.
They are vicious, fierce, and intelligent. There are 13 time zones in Russia, with extensive deposits of food, energy, and precious metals. It has abundant natural resources at least five times greater than the need of its population. Russia can utilize a scorched earth strategy without hesitation and it is naïve to think otherwise. Germany finally realized this truth. Last week, the German Economy Minister said that Germany should face the “bitter reality” that Russia will not resume the gas supply.
Additionally, inflation is higher in Europe than in the U.S. The latest European inflation numbers are 9.1%, but most countries are significantly higher. Turkey’s inflation is 79.6%. The U.K.'s inflation is 10.1% which is a 40-year high. Germany is 8.8% and expected to be double digits before the end of the year. High inflation has provoked the E.U. central bank to raise interest rates for the first time in 11 years, which are significantly lower than U.S. rates. Since the world is a globalized economy, unequal interest rates create issues in Europe and Japan.
What is Happening in Japan
Japan is the third largest economy on earth but has a printing problem worse than the U.S. The Yen will increasingly get crushed by rising rates in other developed nations. The Bank of Japan (BOJ) uses yield curve control. Yield curve control is more extreme printing than the quantitative easing used in the U.S. Yield curve control is like a blank check, and quantitative easing is like a check with a written amount already. Yield curve control means the BOJ will buy any number of bonds to maintain their interest rates between 0-0.25%. Investors in Japanese bonds can sell their 0.25% bonds to the BOJ for a profit and then immediately put their capital into American Treasury bonds for 3.351% (price on 9/6/22). As rates rise globally, it will become increasingly more expensive for the BOJ to support its bond obligations. In April, I warned about the Japan bond crisis and its likelihood of worsening. The chart below shows the Yen’s troubles against the Dollar this year. The highlighted area is when the article was published, warning that the worst wasn’t over yet. It is still going to get worse.
What Does It All Mean?
The Eurozone represents about 15% of the world’s GDP, and Japan is about 8.6%. As the world becomes more fractured and countries de-dollarize, maintaining strong trading partners and allies is more important than ever. As the disparity between interest rates widens, the Dollar will predictably get “stronger.” Our most important trading partners will no longer be able to afford to buy our goods at the same rate. Companies will charge higher prices to existing customers to offset the downsizing customer base. Inflation-weary consumers will not be able to tolerate too much burden, so companies will eventually reverse course and lower prices. Lower prices and fewer consumers will mean lower profits. Lower profits lead to a further downturn in stock and bond markets. As people watch the last of their retirement burn away, the recession will turn into a global depression. Around this time, many countries will develop liquidity crises and look for solutions previously unthinkable. When trillions of dollars reenter the U.S. economy, inflation will be unbearable. Alliances will be broken, and new enemies will emerge. The strong Dollar and low prices will be the perfect opportunity for countries to repatriate dollars stateside to ease their country’s hardships.
What Can You Do About It?
The world and economy are changing very fast. Unfortunately, too many people are either oblivious, apathetic or procrastinating in protecting themselves. Yesterday’s rules no longer apply. The time has come to seek higher ground. The best strategy is the two P’s strategy. Pray and prepare.
We are not a religious organization, so I won’t say too much about prayer. It seems self-explanatory.
Prepare, on the other hand, can mean many things. It means planning and being ready. It may mean planting a garden so you always have food. Preparing means having a few extra bullets, just in case. Preparing also means having a plan to protect your money. High inflation, rising interest rates, war, and our trading partners collapsing all point to more economic woes. Gold will help protect your purchasing power and be there if you need to buy a new currency.
Don't let another day pass without taking action. Protect your family's financial future today.
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