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The story of financial markets and the global economy this year has been written in part by the dramatic rise of the US dollar, whose inexorable ascent has sent shockwaves around the world. At last, however, its breakneck rally could be coming to an end.
What’s happening: The dollar has shed more than 4% so far this quarter, falling back from a two-decade high it reached in September. Last week, investors turned bearish on the greenback for the first time since July 2021, according to data from Societe Generale.
“Markets are anxious for signs of a fundamental shift, and investors are increasingly fearful of missing out since corrections after a peak tend to be swift and steep,” strategists at Goldman Sachs said in the bank’s recently-published 2023 outlook.
What’s changed? First, there was the surprising inflation data in the United States, which showed that prices rose more slowly than expected in October. That bolstered expectations that the Federal Reserve could dial down interest rate hikes soon.
(The sharp run-up in rates this year has been a key reason the dollar has soared. It’s encouraged investors to buy US assets, which have increasingly attractive returns. To execute those transactions, they need to buy dollars.)
Second, there’s been growing optimism that China could be preparing to ease coronavirus restrictions. The government has also been taking steps to deal with a crisis in the country’s real estate sector. Plus, warm fall weather in Europe has reduced concerns about access to energy this winter, leading to slightly more optimistic economic forecasts.
If these economies perform better than expected, the United States won’t look like the only game in town — and other currencies could look appealing again.
“You have a combination of clear signs inflation is slowing down in the US, clear signs Europe may not have as bad a winter as we thought, and clear signs China may be focused more on growth than it was previously,” Jordan Rochester, a currency strategist at Nomura, told me. He thinks it’s possible the dollar’s value has peaked when compared to other major currencies.
Looking ahead: There are, of course, huge risks to the outlook. China continues to play tough on Covid, even though investors desperately hope President Xi Jinping will change his approach soon. The dollar strengthened on Monday after a five-day lockdown was announced in a district of Guangzhou, a major transportation hub.
Major uncertainty lingers around the Federal Reserve’s plans. And Russia’s unpredictable war in Ukraine still has the potential to quickly change the calculus for Europe.
“It’s unlikely that the dollar will fall in a straight line,” Societe Generale’s Kit Juckes recently warned. When it arrives, the peak will probably look jagged, he cautioned, instead of a sharp, clean “imitation of the Matterhorn.”
Why it matters: I’ve written about why the strong dollar has been extremely painful for other countries here. In short, a weaker greenback could make imports of food and energy less expensive, and reduce pain for governments with dollar debts. It could even lower the likelihood of political instability — meaning many leaders will be watching what happens next.
No one in crypto world is safe right now
On the heels of the spectacular implosion of FTX, Coinbase CEO Brian Armstrong has been on a media blitz. His message: Don’t lump us in with the bad actors.
FTX is “not representative of every company in crypto,” Armstrong said in a recent interview with CNBC, noting that Coinbase is based in the United States and is publicly traded, which means its finances can be closely scrutinized. The company even took out an ad in the Wall Street Journal, noting it can be trusted while calling for updated regulations.
Yet investors aren’t buying the message, as fears balloon about the health of the entire crypto sector.
See here: Shares of Coinbase have plunged more than 20% in the past five days. They’re down 84% year-to-date.
Traders are also dumping the company’s debt. The yield on 2028 bonds, which moves opposite prices, has jumped in recent days, topping 15%. At the beginning of the month, it was close to 11%, and was lower than 5% at the start of the year.
Bank of America lowered its price outlook for Coinbase shares late last week. Analyst Jason Kupferberg said that while he’s confident that the startup won’t face the same fate as FTX, “that does not make them immune from the broader fallout within the crypto ecosystem,” as regulators circle and traders pull back.
Bitcoin has fallen below $16,000 this week. It has lost 66% of its value year-to-date.
Tech layoffs shouldn’t spook everyone
A spate of hiring freezes and layoffs in the tech sector has produced an alarming string of headlines, my colleague Nicole Goodkind noted earlier this month. The list of affected companies is a who’s who of the top players: Amazon, Apple, Meta, Stripe — and, of course, Twitter.
But Morgan Stanley doesn’t think this should be read as a warning sign for America’s broader job market.
“Could the sector be a harbinger of changes in labor supply going forward? We do not think so,” the bank’s economists and strategists said in a recent research note.
The team identified two reasons for this. First, they argue, the tech industry is huge when it comes to its stock market valuation, but doesn’t actually employ that many people as a proportion of the total US workforce. Using the broadest possible measure, it accounts for 9% of total employment. Tech layoffs, while significant, make up just over 0.1% of total US payrolls.
Second, the tech world’s approach to hiring and staffing is different from the rest of the economy. Tech employment has “risen sharply” above its pre-pandemic level, while others are just catching up.
One caveat: Morgan Stanley expects the US job market to weaken in 2023 as the economy slows. About 261,000 positions were added in October, and by next summer, the bank expects monthly gains of closer to 50,000.
Still, outside of tech, it doesn’t expect mass cuts — especially given ongoing staffing shortages.