Over the past three years or so, the U.S. economy has outperformed the rest-of-the-world and the market's recognition of this has been shown in the rising value of the U.S. dollar during this period of time.
The U.S. dollar is stronger now than it was at the last low point in the currency's performance.
Here we see the movement of the U.S. dollar since the last market low. This is the Nominal Board U.S. Dollar Index. The value of the U.S. dollar in terms of this index is up by almost 10 percent during this time.
Note the market began rising in early 2021, but its rise accelerated in the spring of 2022 as the Federal Reserve began a period of quantitative tightening. This move was ahead of what any other major central bank was doing.
It was only in the fall of 2022 that other major central banks began to move and this is the major reason why the value of the dollar dropped at that time.
Still, the dollar maintained its relative strength following that period and so we see the "trend" since that time as "modestly positive."
We see the same type of movement in the U.S. dollar/Eurodollar relationship.
From the start date in the chart to the current value, the dollar has risen about 12 percent over the whole period.
These results, to me, show that the market is giving positive marks to the Federal Reserve in its fight against inflation.
The Federal Reserve has kept ahead of other major central banks in its quantitative tightening and has raised its policy rate of interest further than these other central banks.
Although a stronger U.S. dollar is not an explicitly stated objective of the Federal Reserve, Chairman Powell and the Fed have acted in a way that a stronger dollar has been achieved.
It is my belief that Mr. Powell is not disappointed in this result and, in fact, would like to keep the dollar strong going forward.
This is one reason why Mr. Powell is not that anxious to begin to lower the Fed's policy rate of interest.
The strength of the U.S. dollar is the marketplace giving the Federal Reserve a "high grade" for what it has achieved.
Going Forward
Investors should keep their eyes on what is happening to the U.S. dollar.
If the U.S. dollar remains strong in foreign exchange markets, this is all to the good. This means that the marketplace is continuing to give the Federal Reserve a "high grade" for its actions.
Participants in the foreign exchange market know that the Fed still has a long way to go to handle all the reserves that the Fed pumped into the economy during the spread of the Covid-19 pandemic.
The support for the U.S. dollar comes as a statement that the Fed has not lost control of the situation and that, for now, the market has placed its trust in Mr. Powell and the Fed.
This is why we need to continue to watch what happens to the value of the dollar going forward. We need to see whether or not Mr. Powell and the Fed continue to maintain the trust and support of participants in the foreign exchange markets.
The value of the U.S. dollar in foreign exchange markets may be the best indicator of whether or not Mr. Powell and the Fed are continuing to keep the trust of the participants.
I believe that the foreign exchange market will continue to "trust" Mr. Powell and the Fed.
But, this is going to be a "tough" time and a lot is going to be asked of Mr. Powell and the Federal Reserve.
That is why we need indicators of what market participants are thinking and how they are acting.
It will be "good news" if the value of the U.S. dollar continues to rise.
The news will not be so good if the market moves against the U.S. dollar.
John M. Mason
John M. Mason writes on current monetary and financial events. He is the founder and CEO of New Finance, LLC. Dr. Mason has been President and CEO of two publicly traded financial institutions and the executive vice president and CFO of a third. He has also served as a special assistant to the secretary of the Department of Housing and Urban Development in Washington, D. C. and as a senior economist within the Federal Reserve System. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania and was a professor at Penn State University and taught in both the Management Division and the Engineering Division. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
