If fiat currencies are all being incinerated, why is the euro at nearly $1.20 this year?
Yes, the same euro that was nearly left for dead a decade ago. The same one that almost went below parity with the dollar at this time last year! Now, it's at $1.19, heading back up towards the higher end of its historical trading range. And yet I'm supposed to be chasing this ludicrous gold move higher ($5,500 now!) because fiat currencies are imploding?
This is not, in other words, the end of the fiat money system as we know it, or any of the other alarmist takes going around. It is about the U.S. dollar in particular weakening against the euro, which makes up nearly 60% of the dollar index! So when you hear "the dollar is trading at a four-year low," it means basically "a four-year low against the euro," which is a much different story than "fiat currencies are dead."
And the euro actually has sound reasons for strengthening lately. Tim Seymour has been pounding the table about this on our show, rattling off a litany of reasons why the European economy is actually on an upswing--from higher defense spending to, believe it or not, deregulation! "Europe is deregulating even more than the U.S. right now," he said the other day, which is one reason their financial stocks are booming.
In fact, even as the euro has been strengthening over the past year, European stocks continue to make new highs. The Stoxx 600 hit a new record high just two weeks ago. This makes the prospect of any more rate cuts from the European Central Bank unlikely, especially with their target rate already down at 2%.
And that is the key fact. While the Federal Reserve is still talking about cutting rates from 3.6% this year, the ECB is on hold. And voila! That's how you get a dollar that is weakening against the euro. For the boring old textbook reason of shifting interest rate differentials.
In fact, the euro has been so strong that now some European officials are warning that it will undermine their competitiveness! No wonder President Trump shrugged off the dollar's weakness the other day. It's the one outcome that can frustrate Europe, Japan, China, and all of our other trading "partners" in one fell swoop.
See you at 1 p.m!
Kelly