Dollar Doldrums

by Annaly Capital Management

We attended a conference this week hosted by Grant’s Interest Rate Observer, which is always a mix of long and short investment ideas and bullish and bearish macroeconomic observations. This one was no different, although if any one theme could be gleaned from it, that theme would be frustration at the way in which policymakers approach the global system of currencies and foreign exchange. The quote that resonated like cold water in the face was by Frank Byrd of Fielder Research & Management, who reminded the assembled, “We have never been here before—a global regime of fiat currencies at zero bound interest rates.”

As we listened we referred back to our blog post from last Friday, which examined the insurance value of gold in an inflationary world. The facts on the ground are that the dollar seems to be losing its purchasing power as the market prices in the prospect of large-scale asset purchases by the Federal Reserve. All other things being equal, if the capacity of an economy (like the US) or the supply of a commodity (like gold) doesn’t change, but the number of dollars expands, the prices in that economy or that commodity will rise in dollar terms. Hence the rise in gold, copper, and equities, all of which we usually look at priced in dollars. Below we chart these assets in both dollars and euros during their impressive September/October rallies, as inflation expectations rose and the value of the dollar fell.

Gold is actually down in euro terms.


The celebrated and historic rally in equities has been erased.


Doctor Copper’s seeming bullish prognostication of future growth is also flattened.


The dollar-based price movements that we’ve seen in these assets since the beginning of September has been less about expected future real economic growth than it has been about compensating investors for the potential future inflation from a flood of newly printed dollars. What will happen to the prices of risk assets if this expected future inflation doesn’t materialize to bring up the nominal price level is an interesting question to consider.

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