Monday, December 16, 2013

The US Dollar (excerpt)

“What about the dollar?” I heard that question more often in London last week than I usually do in the US. Odds are it will remain strong relative to the yen. Once the Fed starts tapering, the currencies of EMs, especially the ones with current account deficits, could come under renewed downward pressure, as we saw this summer when Fed officials started talking about curtailing bond purchases.

The strength of the euro has been surprising given the weakness of the Eurozone economy. It certainly doesn’t help their feeble recovery since it is likely to weigh on exports. There are two obvious explanations for the strength of the euro: The Eurozone is running a trade surplus (thanks to Germany and Italy), while the US has a trade deficit. In addition, the Fed’s balance sheet is growing, and will continue to do so even when tapering begins, while the ECB's balance sheet has been shrinking since the end of June 2012.

Today's Morning Briefing: Back Home. (1) “Stay Home” or “Go Global”? (2) "World-wind" tour in London. (3) Upbeat on US, with a few concerns. (4) Obamacare is equivalent to fiscal drag. (5) Housing facing some headwinds. (6) Retail sales rising along with solid earned income gains. (7) Eurozone stock rally yet to be confirmed by fundamentals. (8) Eurozone’s hard data remains soft. (9) More downside for yen and more upside for Nikkei, but Japan’s economic prospects remain challenging. (10) China is looking better than other EMs. (11) Why is the euro so strong? (12) Focus on market-weight-rated S&P 500 Retailers. (More for subscribers.)

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