DJT thinks the dollar is too strong. He wants a weaker buck. And he’s going to get his wish … but the reason will be because of something few investors expect: a strong euro.
“Strong” and “euro” are not a pair of words that have spent much time commingling in recent years. At $1.06 per euro today, the European currency has lost nearly 24% on the dollar since its last major peak in 2014. Go back to its all-time high in 2008 – up near $1.60 – and the euro is off 34%.
Lots of reasons for that, of course, including:
- The Greek debt debacle that still drags along today;
- Unemployment remains problematic, particularly among the southern nations and particularly among youth;
- The threat of a sovereign crisis still exists in places such as Italy and Greece;
- Populism/nationalism has taken hold in a broad swath of countries, and the threat a populist leader might (but won’t) win office in France has some investors spooked about having money at work on the Continent;
- A swarm of Muslim migrants fleeing the Middle East and North Africa is straining Continental resources and nerves;
- A continual stream of low-level and headline-grabbing terrorist attacks has some investors rethinking the safety of their capital.
Then again, we all have our problems…
But here’s the thing, Europe is in better condition than the U.S. and U.K. media would have you believe – a sentiment I’ve been sharing with my readers at a former publication since 2015.
I’ve been going back and forth to Europe for many years now. I’ve hopscotched from Ireland to Russia, Sweden to Greece, Spain to Estonia and a large smattering of countries in between – 24 countries in all. The place has been on the mend for a good while … and only know is that fact beginning to reveal itself in the data.
- Unemployment that peaked near 11% is approaching 8%.
- Inflation is at a four-year high.
- GDP growth is ratcheting up, even in long-underwhelming economies such as France and Spain.
- Consumer sentiment is very near pre-crisis levels.
These are not one-month trends. All the data have been moving in the right direction for a while now.
And that tells me we might be in for shocker later this year…
Europe Raises Rates … and America Cuts!
My prediction: The European Central Bank surprises the world and raises interest rates.
The raise won’t be huge; the ECB certainly isn’t keen on cutting the fuel line that’s powering EU expansion at the moment. But raise it will do, nonetheless. Like our own Fed, the ECB wants to move the Eurozone away from unnaturally low interest rates – in this case, negative interest rates.
That in itself will be enough to push the euro higher against the dollar – or, conversely, weaken the dollar relative to the euro.
Conceivably, the ECB’s action could come as the Fed offers up its own surprise: It could either decline to raise rates any further, or quite possibly could cutt rates.
There’s not a great deal of economic data that says the Fed should be aggressively raising rates right now. And two months into office, Trumponomics has mellowed. China is no longer a currency manipulator and Lil’ Rasputin Steve Bannon is on the outs, so imposing tariffs on China seems unlikely. Nafta, which DJT once “the worst trade deal maybe ever signed anywhere,” now just needs a few tweaks, thus averting an unnecessary and economically damaging pissing matching with Mexico; and tax reform seems quite likely to be more muted than originally envisioned, if one believes the words coming out of DJT’s own party.
As such, the Fed has no reason to proactively manage what would have been the economically negative impacts of the Trump doctrine. Instead, the Fed can concentrate on what will be far-more salient factors, including:
- A weakening and increasingly indebted U.S. consumer;
- The potentially disastrous impacts higher interest rates would have on consumer debt that is now back at pre-crisis levels;
- And what is likely to soon be a declining stock market that undermines consumer sentiment, which then spills over into consumer spending in our consumer-dependent economy.
If the game plays out that way, we will see a situation where U.S. interest rates are coming down while European rates are rising. The spread between dollar rates and euro rates will narrow. And perceptions that the Continental economy is faring better will see money leave the greenback and flow into the euro.
That’s exactly what I expect will happen at some point this year.
Our Profit Strategy
Own euro exposure.
For equity investors, own WisdomTree SmallCap Dividend Fund (DFE) – a great way to own the small, growthy companies in Europe without worrying about currency exposure, since smaller companies tend to be oriented more toward the Eurozone. Plus we pick up a nice dividend exceeding 5%.
At the larger end of the market, I’m a fan of Vanguard FTSE Europe ETF (VGK). The fund is unhedged, meaning you get pure exposure to the underlying currency. It covers a broad collection of Europe’s developed markets and holds the biggest names on the Continent. And it’s one of the lowest-cost European ETFs. To me, it’s the best European analog for an S&P 500 ETF here in the States.
And on the currency side, I continue to recommend Guggenheim CurrencyShares Euro (FXE).
I don’t agree with much of what DJT says or does, but when it comes to the dollar, he’s right. It’s too strong, and it has been for a while now, and that hurts America’s crucial multi-national companies. I think his comments gives the Fed the room it needs to slow its roll with interest-rate hikes and to manage for an economically invigorating weaker dollar.
Until next time, good trading…