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The history of financial markets and the global economy this year has been written in part by the dramatic rise of the US dollar, whose inexorable rise has sent shock waves around the world. Finally, however, its frantic rally may be coming to an end.
What’s happening: The dollar has lost more than 4% so far this quarter, falling back from a two-decade high reached in September. Last week, investors turned bearish on the greenback for the first time since July 2021, according to data from Societe Generale.
“Markets are eager to see signs of fundamental change, and investors are increasingly fearful of missing out, as corrections after a spike tend to be quick and steep,” Goldman strategists said. Sachs in the bank’s recently released 2023 outlook.
What changed ? First, there was the startling US inflation data, which showed prices rising slower than expected in October. This bolstered expectations that the Federal Reserve could soon scale back interest rate hikes.
(The sharp rise in rates this year has been a major reason for the soaring dollar. It has encouraged investors to buy US assets, which have increasingly attractive yields. To execute these trades, they have to buy dollars.)
Second, there is growing optimism that China may be preparing to ease coronavirus restrictions. The government has also taken steps to deal with a crisis in the country’s real estate sector. Additionally, warm fall weather in Europe has eased concerns about energy access this winter, leading to slightly more optimistic economic forecasts.
If these economies perform better than expected, the US won’t seem to be the only game in town – and other currencies could become attractive again.
“You have a combination of clear signs that inflation is slowing in the United States, clear signs that Europe may not have as bad a winter as we thought, and clear signs that China may be more focused on growth than it was before,” Jordan Rochester, a currency strategist at Nomura, told me. He thinks it is possible that the value of the dollar has peaked against other major currencies.
Looking ahead: There are, of course, huge risks to the outlook. China continues to play rough with Covid, even as investors are desperate for President Xi Jinping to change his approach soon. The dollar strengthened on Monday after the announcement of a five-day lockdown in a district of Guangzhou, a major transport hub.
Great uncertainty hangs over the Federal Reserve’s plans. And Russia’s unpredictable war in Ukraine still has the potential to quickly change the calculus for Europe.
“The dollar is unlikely to fall in a straight line,” Societe Generale’s Kit Juckes recently warned. When he arrives, the summit will likely look jagged, he warned, instead of a “clean, crisp imitation of the Matterhorn”.
Why it matters: I’ve written about why the strong dollar has been extremely painful for other countries here. In short, a weaker greenback could make food and energy imports cheaper and lessen the pain of dollar-indebted governments. It could even reduce the likelihood of political instability, which means many leaders will be watching what happens next.
In the wake of FTX’s spectacular implosion, Coinbase CEO Brian Armstrong went on a media blitz. His/Her message: Do not confuse us with the bad actors.
FTX is “not representative of all crypto businesses,” Armstrong said in a recent interview with CNBC, noting that Coinbase is US-based and publicly traded, which means its financials can be scrutinized. close. The company even ran an ad in the Wall Street Journal, noting that it can be trusted while calling for updated regulations.
Still, investors aren’t buying the message, as fears are skyrocketing about the health of the entire crypto sector.
See here: Coinbase shares have plunged more than 20% in the past five days. They are down 84% since the start of the year.
Traders also forfeit company debt. The 2028 bond yield, which moves opposite to prices, has surged in recent days, topping 15%. At the start of the month, it was close to 11%, and was below 5% at the start of the year.
Bank of America lowered its price outlook for Coinbase shares late last week. Analyst Jason Kupferberg said while he’s confident the startup won’t suffer the same fate as FTX, “that doesn’t immunize them from broader fallout within the crypto ecosystem,” as regulators circle around and traders retreat.
Bitcoin fell below $16,000 this week. It has lost 66% of its value since the start of the year.
A series of hiring freezes and layoffs in the tech sector has produced an alarming series of headlines, my colleague Nicole Goodkind noted earlier this month. The list of companies affected is a who’s who of the top players: Amazon, Apple, Meta, Stripe – and, of course, Twitter.
But Morgan Stanley doesn’t think that should be read as a warning sign for the broader US labor market.
“Could the sector be a harbinger of changes in labor supply in the future? We don’t think so,” the bank’s economists and strategists said in a recent research note.
The team identified two reasons for this. First, they argue, the tech industry is huge in terms of its market valuation, but doesn’t actually employ that many people as a proportion of the total workforce in the United States. Using the broadest measure possible, it represents 9% of total employment. Tech layoffs, while significant, represent just over 0.1% of the total US payroll.
Second, the tech world’s approach to hiring and staffing is different than the rest of the economy. Tech employment has “greatly increased” above its pre-pandemic level, while others are just catching up.
A word of caution: Morgan Stanley expects the US labor market to weaken in 2023 as the economy slows. About 261,000 positions were added in October and by next summer the bank expects monthly gains of more than 50,000.
Still, outside of technology, he doesn’t expect massive cuts, especially given ongoing staffing shortages.