It’s a popular time to be a dollar bear, with the Federal Reserve running the proverbial money printing presses as fast as possible, and the dollar index DXY, -0.25% down close to 10% from its highs of March.
Robin Brooks, chief economist at the Institute of International Finance and the former chief global currency strategist at Goldman Sachs and senior economist at the International Monetary Fund, isn’t sure they are right.
First, he points out, there are almost two different dollars — one versus the G-10 industrialized nations, and another versus emerging markets.
Many emerging-market countries are commodity exporters, and they have seen their currencies depreciate since 2013, even when adjusted for inflation, because of the trade shock from the drop in oil prices.
“Most of our clients have in mind, a sort of rebound that we saw in [2009] when emerging markets did rebound significantly — the Brazilian real USDBRL, -0.03%, the Chilean peso USDCLP, and so forth — but that was because China was doing a massive infrastructure stimulus, and we just don’t have that now,” Brooks says.
As for the euro EURUSD, +0.25%, positioning data from the Commodity Futures Trading Commission suggests bets on the shared currency’s appreciation are near all-time highs. But Brooks notes this comes at a time when the trade-weighted euro is also near records, because the emerging market currencies are so weak. Brooks says a euro at $1.20 now is equivalent to what a euro at $1.40 used to be.
Further, the euro isn’t as undervalued as its current-account surplus would suggest, because of structural issues in countries such as Italy and Spain, Brooks says.
Brooks also discusses the Turkish lira USDTRY, -0.00%, which on Friday traded at a record low vs. the dollar. “The devaluation in 2018 was basically a current account story, and we believe that’s what is happening again,” he says. The push for growth through credit is what’s behind the worsening current-account deficit — also exacerbated by a decline in tourism — and that will need to correct, he says.
The IIF’s fair value is a dollar to be worth 7.50 lira — suggesting more pain to come.
The buzz
U.S. retail sales for July edged up just 1.2%, though June’s growth was revised upward to 8.4%. Productivity surged 7.3% in the second quarter, while industrial production rose 3% in July after a 5.7% gain in June. Chinese retail sales disappointed again, falling 1.1% in July, though industrial production did rise.
U.S.-China tensions were in the spotlight, as Secretary of State Mike Pompeo said the U.S. would designate Confucius Institutes, which are funded by the Chinese government, as a foreign mission, and President Donald Trump said the TikTok social-media app has to be proved to be totally secure for the White House to approve an acquisition by Microsoft MSFT, +0.09% or another company. “We don’t want to have any information going into China with what we’ve been through,” Trump said.
U.S. Trade Representative Robert Lighthizer and Chinese Vice Premier Liu He will participate in talks on their Phase 1 trade agreement, according to press reports.
The U.K. is adding France and the Netherlands to its countries where travelers have to quarantine upon returning home. In the U.S., coronavirus deaths rose on Thursday but confirmed cases declined.
The European Commission agreed to buy 300 million doses of a vaccine from AstraZeneca AZN, -1.09% , while the U.K. agreed to buy coronavirus vaccines developed by a Johnson & Johnson JNJ, +0.16% subsidiary and by Novavax NVAX, +9.92%.
China streaming service iQiyi IQ, -11.16% and its parent Baidu BIDU, -6.28% may see pressure after disclosing a U.S. Securities and Exchange Commission probe. Search engine Baidu separately reported results showing better-than-forecast earnings, but on slightly worse revenue than forecast.
Apple AAPL, -0.08% and Google GOOG, -0.70% dropped the popular game Fortnite from their app stores after Epic Games introduced a direct payment plan that doesn’t give the technology giants their 30% cut.
Microchip-maker supplier Applied Materials AMAT, +3.91% reported results and an outlook that topped Wall Street estimates. Sports-betting company DraftKings DKNG, -5.93% reported a wider-than-forecast loss as a report said the Internal Revenue Service will require fantasy sports companies to pay federal excise tax on their entry fees.
The market
U.S. stock futures ES00, +0.07% YM00, +0.06% NQ00, +0.12% were mixed, a day after a mixed finish on Wall Street that saw the S&P 500 SPX, -0.01% down but the Nasdaq Composite COMP, -0.20% registering its second-highest finish ever.
Oil CL.1, +0.52% and gold GC00, +0.20% futures fell.
The chart
As lawmakers continue to debate whether to extend the $600 a week federal unemployment benefits, the San Francisco Federal Reserve published a blog arguing it would be illogical for most workers to refuse work because of the extra payment, as a job offer must be compared with a weekly income while unemployed that may expire before another job can be found. “Comparing the reservation benefit of work and total unemployment insurance payments with eight weeks of extended benefits remaining, only food service workers would be indifferent between the two,” said Nicolas Petrosky-Nadeau, a San Francisco Fed researchers.
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