The biggest influences by far in the currency markets are the large global banks. I view them as playing a very sophisticated game that looks much farther into the future than the one the typical equity person like me is involved in. One consequence is that significant changes in the economic environment often start to play out in the currency markets before spreading elsewhere.
The currency markets aren’t infallible indicators. The dollar dropped by 20% against the euro (which is not a stellar currency, either) during the first year of Trump as president. Since then the euro has been sliding back, as Europe’s internal problems–Brexit, Italy, early, very deadly arrival of the coronavirus–came to the fore.
Despite all this European ugliness, since mid-May the US dollar has been dropping, steadily and sharply, against the euro. It’s now down by about 9% against the EU currency.
How so? mostly Trump’s incompetence, I think. Europe used US medical science to control the pandemic, while Trump’s urging his supporters to flaunt medical recommendations has it raging again domestically. I don’t think the currency markets are as much concerned about the deaths as about the second round of fiscal stimulus that his bungling has made necessary and its effect on the national budget deficit/national debt.
Trump has also compounded the risk of holding Treasuries by his suggestions that the the US may choose not to repay holders he doesn’t like.
There’s no reason to think the bad news is over, either. Trump is insisting that schools reopen on schedule without pandemic safeguards–creating the worry that a third multi-trillion dollar support payment may ultimately be needed. He’s also intensified his campaign of race hatred, drawing comparisons with Hitler’s rise in the 1930s. Then, there’s the test to detect signs of dementia that he keeps mentioning–which can be seen itself as a sign of the disease he insists he is not suffering from.
Currency weakness is good for exporters and bad for importers. It’s also good for the many S&P 500 companies that have foreign subsidiaries.
Gold is up about 12% since mid-May. An old, but still useful, rule about the gold price is that it remains stable in the stronger of the two currencies, US$ and DM (now the euro). In other words, most of the price rise is due to the decline of the dollar. Still, there has been a small upward movement. My interpretation–and I’m about as far away from being a gold bug as one can get–is that this is more a reflection of how pricey everything else is than a genuine desire to own gold
Personally, I think there’s a better case for bitcoin than for gold. There’s been a sharp spike in bitcoin this week, again more, I think, a result of how expensive other things are. Were Trump to be reelected and his fracturing of the US economy to continue, I imagine bitcoin would draw a lot more interest.