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TOPIC: Where is the dollar going?

Where is the dollar going? 2 months 2 weeks ago #1

  • Pepe le Moko
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One of the cool things about not being an economist or even particularly smart is that I can say pretty much what ever I want and be pretty sure that nobody is going to bet the farm on my being right.

One of the Big Questions right now is "What is going on with the dollar?". When we ask this question we have to be specific. What exactly is the dollar? A quick way to find out is to type "Dollar Index" into your favorite search engine. Google obliges and tells me that the dollar index is actually something I can buy on a futures exchange.
Years ago I bookmarked this link to the :
New York Board of Trade Dollar Index
Right now 2016-08-10 it looks like this:

This is called a trade weighted dollar index. You can read more about it here:

Long story short the Federal Reserve keeps a Trade Weighted Dollar Index for the Major Currencies. They calculate this index by "weighting" that is to say by multiplying by a fudge factor all the "Big" currencies that the US trades with. The exact method they use to calculate the weights can be found on the Fed website. The NY BOT DX Dollar index is a snapshot of this weighting system before the Euro was introduced. The Euro combines 19 of the biggest trading partners of the US. At the time the NYBOT_DX was "frozen" they represented a much bigger proportion of US trade. Let's cut to the chase. The NYBOT_DX is just the inverse of the euro:

The Fed does keep another Dollar index and that is the Broad Index. This consists of all currencies that the US trades with and as you can see it is not now and has never been close to the "Major" index.

Here is the kicker; The guests that Erik T. has on all use the Major Currencies measure. If not they would have said so. I think that some of them are using the NYBOT_DX. The NYBOT_DX is even closer to the Euro. What is actually going on is that they are looking at the Euro not the Dollar.

So to get to my point, what is going on with the ... Euro?

Let's start small. This is the Swiss Franc Vs. the Euro (trust me it is really.) :

What happened was that the Swiss central bank saw the Franc shooting up vs. the Euro, stepped in and instituted a peg to the Euro ( on 6 Sept 2011 the same day that Gold topped ... hummmm ). The flat part in the chart is the "peg". You can see that it is not perfect. It fluctuates up and down in a small "band". The Swiss central bank did this to discourage speculators. Abruptly on 16 Jan 2015 they dropped the peg. The Swiss national bank went deeply into debt trying to defend the peg and it didn't actually help the economy much. A peg is usually a bad idea.

The next thing I want you to look at is the Mexican Peso:

This is called a "Crawling peg". Wikipedia has this to say about Crawling Bands ( crawling pegs are similar ):
Crawling bands
The rate is allowed to fluctuate in a band around a central value, which is adjusted periodically. This is done at an unannounced rate or in a controlled way following economic indicators.

Note that the actual rate has to be a secret or speculators ( that is you and me ) will figure out what the real rate is and front run the central bank. In the case of Mexico it is pretty easy to tell what the "secret" rate is. The Peso is depreciating against the Dollar by 2.77% per year. They try to keep the Peso in the purple channel, but if that proves too difficult or they just want to scare away speculators, they will widen the band to the green lines. I'm going to guess that the next stop is the lower green line. Mexico doesn't have a reason to "unpeg" just yet.

With this in mind, let's look back up at the top chart of the "Dollar". I identify this as a "Pegged Float" and looking at the Euro:

The Euro is pegged between $1.05 and $1.15. This has been going on since Jan 2015 ( coincidentally about the same day that the Swiss national bank broke it's peg to the Euro) .

Why is this important? Pegs ALWAYS break. Usually abruptly and violently, like the Swiss Franc. The ECB has deep pockets. This could go on for some time.
Last Edit: 2 months 2 weeks ago by Pepe le Moko. Reason: more spelling errors
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Where is the dollar going? 2 months 1 week ago #2

  • Pepe le Moko
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Now class, can anybody tell me what is wrong with this article?
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Where is the dollar going? 2 months 1 week ago #3

  • Michael Gebhart
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The Fed won't raise rates if corporate profits fall from a strengthening USD?
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Where is the dollar going? 2 months 1 week ago #4

  • Pepe le Moko
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Why would corporate profits fall if "the Dollar" is pegged? What products does America sell abroad? Lawyers?

More to the point, that thing that they are measuring is not the dollar. It is a poor measure of the Euro. China and in fact the bulk of America's trading partners are not included. Idiots use this measure. If you draw lines on an idiotic chart you draw idiotic conclusions.
Last Edit: 2 months 1 week ago by Pepe le Moko. Reason: poetry!
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Where is the dollar going? 2 months 1 week ago #5

  • Pepe le Moko
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Hey! Is it a good time for a rant? It's always a good time for a rant!

The Dow Jones Industrial average consists of these components:
MMM 3M Co.
AXP American Express Co.
AAPL Apple Inc.
BA Boeing Co.
CAT Caterpillar Inc.
CVX Chevron
CSCO Cisco Systems Inc.
KO Coca-Cola Co.
DD E.I. DuPont de Nemours & Co.
XOM Exxon Mobil
GE General Electric Co.
GS Goldman Sachs Group Inc
HD Home Depot Inc.
INTC Intel Corp.
IBM International Business Machines Corp.
JNJ Johnson & Johnson
JPM JPMorgan Chase
MCD McDonald's Corp.
MRK Merck & Co. Inc.
MSFT Microsoft Corp.
PFE Pfizer Inc.
PG Procter & Gamble Co.
TRV Travelers Cos.
UTX United Technologies Corp.
UNH UnitedHealth Group Inc.
VZ Verizon Communications
V Visa Inc
WMT Wal-Mart Stores Inc.
DIS Walt Disney Co.

Which ones might conceivably be termed industrial i.e. they make stuff ... like steel or tractors?
MMM3M Co.They make ... yellow sticky pads... I think
AAPLApple Inc.Well ... Hummm... They buy stuff from Chinese subsidiaries ... scratch that. They buy cell phones from Chinese companies and sell them to us. Apple is a marketing company ( mostly).
BABoeing Co.Yeah! This one is an industrial company! Let's take bets on when they go out of business or get dropped from the DOW. On second thought, they are a military contractor and don't need to have a business model! Cool!
CATCaterpillar Inc.Look mom, I found one!
CVXChevronThey own a chain of retail gas stations. How much actual drilling do they do?
CSCOCisco Systems Inc.An actual American manufacturer! I have bought many Cisco routers. At one time they smelled of fish ( no longer). The reason was that the Chinese steel company that makes the cases quenched the steel in fish oil. All cicso gear is made in China.
DDE.I. DuPont de Nemours & Co.Isn't that one French?
XOMExxon MobilAgain let's take bets on when this one gets dropped from the DOW.
GEGeneral Electric Co.Don't they make light bulbs?
INTCIntel Corp.Funny how we have all these computer companies in the DOW. What actual productivity improvement do you get from computers? They make 20 something bro-grammers rich. That must be good for the economy!
IBMInternational Business Machines Corp.Do you know that IBM was dropped from the DOW for more than 20 years?
MRKMerck & Co. Inc.Well they make products. Drugs are consumer products, not industrial products. America doesn't make industrial products any more.
MSFTMicrosoft Corp.Produces no industrial products. In fact no "products" at all.
NKENIKE IncReally?
PFEPfizer Inc.A drug and chemical company.
UTXUnited Technologies Corp.A defense contractor. They don't need a business model!

That's it for industrial companies. What do you think of that? We have a service economy. That means one group of lawyers sues another group of lawyers and we all get rich.
Last Edit: 2 months 1 week ago by Pepe le Moko.
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Where is the dollar going? 2 months 1 week ago #6

  • darioj
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US exports made in China ;)
I think it is not going much higher than 100. In a perfect world... maybe briefly higher and later stall for a while before a drop.

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