In the Shadow of the US Dollar: New Scenarios - March 22, 2015

We got almost what we had expected from Federal Reserve’s policy meeting on 18th March even though the leaders of FED refrained from raising interest rates in the future. No wonder, as during these past month significant changes has happened in the macro economy. US dollar index has strengthened by 25 per cent since 2014 first semester. This is a huge difference. In addition, if this dollar strengthening trend continues it can seriously affect other economic regions’ chances for the next years.

There will not be any inflation in the United States (the oil price fall have already had a negative impact on it), the strong greenback (that seems to be stable) might be able to keep inflation under the ideal 2 per cent in the next couple of years which means that FED will not hurry increasing rates and it might happen that contrary to market expectations there will be no rate increase in 2015 (or only maybe at the end of the year the earliest). Moreover, the strengthening dollar can have a negative impact on the GDP growth rate (a 2-2.5 percent GDP growth is still possible) not to mention listed companies’ profit possibilities. The lion’s share of multinational corporations’ real earning is mostly outside of the United States, which means they will have less earning in US dollar because of the strong dollar. This can also have an impact on stock prices.

However, it seems that this intense dollar strengthening or rather euro weakening is good for Europe, as it increases European corporations’ competitiveness, corporate profits (as well as listed companies profit) and by that having a positive impact on boosting European economic growth. This year’s European news will be all about the fear of deflation but starting from 2016, inflation might appear in the euro zone. This would not be so bad if Europe had 2-3 per cent GDP growth and corporations could produce a 10-20 per cent more profit. No wonder, European stocks attract traders and by that are able to catch up to the United States’ market.

It is certainly worth observing the events from China’s point of view as well. In China, the economic growth is already slowing down; in addition, yuan depends on the US dollar, which means that the strengthening dollar is slowing China’s economy even more. The Chinese government is trying to even things out and the forecast 7 per cent GDP growth is in danger. The Leaders are trying to control the slow down not by credit expansion anymore but by fiscal tools, yuan devaluation and lower interest rates. There is a very good chance that China will enter the currency war. Chinese stock market can still profit from these events and last year’s economic growth can still carry on.

By Innovative Securities

(Image: Wikimedia)