The U.S. Dollar Index is trading
sharply higher this morning gaining 0.68 cents to $81.00. On
November 4th, 2010 the U.S. Dollar Index was trading as low as
$75.63. At the same time the S&P 500 Index was making new highs
for the year around the 1227.00 level. However, once the European
Union began to signal new debt worries the U.S. Dollar Index has
surged higher and the major market indexes around the world have
sold off. Is a stronger U.S. Dollar index good for the world or bad
for the world?
When the U.S. Dollar Index declines or trades lower the global
markets seem to inflate and trade higher. Most commodities from
copper(NYSE:JJC) to cotton(NYSE:BAL) soar higher when the U.S.
Dollar Index declines. Oil and most other energy products also
increase in price when the U.S. Dollar Index declines and higher
oil actually makes most manufactured goods more expensive. It is
important to note that oil is used in the making of rubber,
plastic, paint, and almost everything that is made for commercial
and industrial use. Therefore, while a weak U.S. Dollar Index will
help inflate asset prices it is a direct tax on the U.S.
consumer.
What are the positives of a stronger U.S. Dollar Index? The
stronger U.S. Dollar Index will simply make for cheaper prices in
all commodities, and give the U.S. consumer stronger buying power.
As we all know by now the U.S. consumer loves to spend money.
Please note that U.S. consumer spending accounts for roughly 70.0
percent of the gross domestic product in the United States. If the
U.S. consumer could buy more goods at lower prices why would that
be a bad thing for the U.S. economy? If Americans can find goods to
be fairly valued they would certainly consume a lot more. For
example, if the housing market in the United States declined enough
most people with money would certainly begin to buy up the excess
supply. As it is right now there seems to be very little interest
in the buying of homes in the United States. Supply is out pacing
the demand by a huge margin. This weak demand comes despite the
lowest mortgage interest rates in modern history.
The answer to solving this problem is to let supply and demand work
as it was designed. If the system cannot function correctly the
inevitable will just be prolonged. If the stock market and housing
market is ever going to operate on the laws of supply and demand it
will need to stop being propped up by the central banks around the
world. Once supply and demand dictates what trades higher and lower
the world will be fine once again.
Nicholas Santiago
Chief Market Strategist