We’ve observed several times so far this year, most recently in Weekly Update 20220903, that the declines in asset prices have so far not so much reflected a decline in asset values as an increase in the value of the unit of account … if your unit of account is the US dollar. It simply takes fewer bigger dollars to buy the same stuff. This dollar strength has also been the main Synthetic Systems miss … while the runs through the beginning of this year did indeed anticipate dollar strength, reflected in the rising Bills plot, they substantially ‘misunderestimated’ it.
That strength has continued. Conventional finance refers to “the dollar” in forex terms … “the dollar” is said to be “strong” or “weak” if it is appreciating or depreciating relative to other currencies. Since other currencies themselves may be appreciating or depreciating, this narrow view is an inadequate or misleading indicator of what the overall market value of the dollar is doing. Here at Financology we look at the dollar in the broader context of all the world’s asset markets. But it often turns out that these viewpoints are consonant, and this is one of those times.
This Bloomberg article does a deeper dive into the forex aspect of this dollar strength. But make no mistake … this is true dollar appreciation, which we might even call deflation were the latter term not so laden with baggage. For an economy beset with consumer price inflation, this is good news. For individuals and institutions short USD (in debt, leveraged…) … not so much.