Why the soaring dollar and crashing euro are rattling global markets: Morning Brief

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Friday, July 15, 2022

Today’s newsletter is by Jared Blikre, a reporter focused on the markets on Yahoo Finance. Follow him on Twitter @SPYJared.

The US dollar (DX-Y.NYB) is on fire, reaching near-parity with the euro (EUR = X) for the first time in two decades.

The yen (JPY = X) is down 20% versus the dollar over the last year – nearly unheard of in the modern era.

Bitcoin (BTC-USD) has crashed 70% against the dollar since its November record high – not unheard of, but painful.

Some of this might be great for Americans shopping or traveling abroad, but these moves are wreaking havoc on global markets and leaving many investors scratching their heads.

After all, the Fed “printed” $ 9 trillion by buying Treasury bonds, which might sound like a massive devaluation of the greenback. And now the dollar is soaring as traditional inflation hedges like gold are getting crushed.

So: what gives?

There are two key factors at work.

First, interest rates are surging in the US as the Federal Reserve moves to tamp down 40-year highs in inflation. And if global investors want to get paid the relatively higher interest rates here, they sell their local currency, buy dollars, invest in US bonds, and pocket the difference. There are hedging costs in this so-called “carry trade,” but it’s fairly simple in theory and a favorite hedge fund.

Second, foreign investors in weak economies are buying the greenback for its relative safety. Inflation at home is soaring and the political situation in the US is messy at the very least, but there are so far no worries among investors the US government will fail to meet its financial obligations.

Taken together, these haven flows in combination with large interest rate differentials have led to investors bidding up the dollar at an uncomfortable rate.

And much like the surge in interest rates, the huge moves in the dollar currency crosses are wreaking havoc for global investors.

A trader shows US dollar notes at a currency exchange booth in Karachi, Pakistan December 3, 2018. REUTERS / Akhtar Soomro

A trader shows US dollar notes at a currency exchange booth in Karachi, Pakistan December 3, 2018. REUTERS / Akhtar Soomro

Trades in the normally-quiet US Treasury and dollar foreign exchange markets are highly levered.

Investors in these markets are often seeking to eke out a few basis points – or hundredths of a percent – from a given move. To make these bets, they employ massive leverage to magnify the small gains.

This year, bets across these markets have been unwinding – oftentimes chaotically – spilling over into the plain vanilla stock market.

And canvassing the reaction in corporate America, the dollar is wreaking havoc in the C-suite.

According to FactSet, 40% of the total revenue of S&P 500 companies is from abroad, with the tech and materials sectors deriving over 50% of their sales outside the US

One positive to come out of the soaring dollar has been a reversal in the recent bubble in commodities, which has started weighing on oil, gas, and grain prices. Lower input prices are great for companies and eventually consumers, but it’s the volatility that’s the real killer.

If you were an airline earlier this year trying to hedge your fuel costs when WTI crude oil (CL = F) was trading in the $ 120 / barrel range – you probably just wasted a lot of money given the price is now in the mid-nineties .

So as we head into earnings season, we’ll look for more clarity on the fallout from the latest currency moves – and what executives see in the coming quarters. Analysts will then get to work and revise their own expectations – expectations that are still extremely lofty by historical standards.

And as we’ve all learned this year, bad news gets priced in rapidly.

What to Watch Today

Economic calendar

  • 8:30 am ET: Empire ManufacturingJuly (-2.0 expected, -1.2 during prior month),

  • 8:30 am ET: Retail Sales Advancemonth-over-month, June (0.9% expected, 0.3% during prior month)

  • 8:30 am ET: Retail Sales excluding carsmonth-over-month, June (0.7% expected, 0.5% during prior month)

  • 8:30 am ET: Retail Sales excluding cars and gasmonth-over-month, June (0.1% expected, 0.1% during prior month)

  • 8:30 am ET: Retail Sales Control GroupJune (0.3% expected, 0.0% during prior month)

  • 8:30 am ET: Import Price Indexmonth-over-month, June (0.7% expected, 0.6% during prior month)

  • 8:30 am ET: Import Price Index excluding Petroleummonth-over-month, June (0.2% expected, -0.1% during prior month)

  • 8:30 am ET: Import Price Indexyear-over-year, June (11.4% expected, 11.7% during prior month)

  • 8:30 am ET: Export Price Indexmonth-over-month, June (1.2% expected, 2.8% during prior month)

  • 8:30 am ET: Export Price Indexyear-over-year, June (19.9% ​​expected, 18.97% during prior month)

  • 9:00 am ET: Bloomberg July United States Economic Survey

  • 9:15 am ET: Industrial Productionmonth-over-month, June (0.1% expected, 0.2% during prior month, downwardly revised to 0.1%)

  • 9:15 am ET: Capacity UtilizationJune (80.8% expected, 79.0% during prior month, upwardly revised to 80.8%)

  • 9:15 am ET: Manufacturing (SIC) ProductionJune (-0.1% expected, -0.1% during prior month)

  • 10:00 am ET: Business InventoriesMay (1.4% expected, 1.2% during prior month)

  • 10:00 am ET: University of Michigan SentimentJuly preliminary (50 expected, 50 during prior month)

  • 10:00 am ET: University of Michigan Current ConditionsJuly preliminary (53.7 expected, 53.8 during prior month)

  • 10:00 am ET: University of Michigan ExpectationsJuly preliminary (47 expected, 47.5 during prior month)

  • 10:00 am ET: University of Michigan 1-Year InflationJuly preliminary (5.3 expected, 5.3% during prior month)

  • 10:00 am ET: University of Michigan 5-10-Year InflationJune final (3.0% expected, 3.1% during prior month)

Earnings

Pre-market

  • Wells Fargo (WFC) is expected to report adjusted earnings of 80 cents per share on revenue of $ 17.54 billion

  • BlackRock (BLK) is expected to report adjusted earnings of $ 7.90 per share on revenue of $ 4.65 billion

  • City Group (C) is expected to report adjusted earnings of $ 1.70 per share on revenue of $ 18.48 billion

  • BNY Mellon (BK) is expected to report adjusted earnings of $ 1.12 per share on revenue of $ 4.18 billion

  • UnitedHealth (UNH) is expected to report adjusted earnings of $ 5.19 per share on revenue of $ 79.62 billion

  • PROGRESS (PGR) is expected to report adjusted earnings of 85 cents per share on revenue of $ 12.39 billion

  • US Bancorp (USB) is expected to report adjusted earnings of $ 1.07 per share on revenue of $ 5.92 billion

  • State Street (STT) is expected to report adjusted earnings of $ 1.73 per share on revenue of $ 3 billion

  • PNC Financial (PNC) is expected to report adjusted earnings of $ 3.14 per share on revenue of $ 5.14 billion

Post-market

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