An Opportunity, Not Taken?
About that buoyant US Dollar: The New York Times assigns a sort-of narrative.
A random handful of accurate fact checks do not a cohesive argument make.
I shared this September 25, 2014 New York Times Article (Landon Thomas Jr.) on Facebook recently, with a note that I was going to outline it for use in undergraduate lecture.
Titled, “Buoyant Dollar Underlines Resurgence in US Economy,” I noted,
“It’s always helpful when a ‘finance’ article comes out that’s probably written to sway a non-financial audience.”
I typically assign a simple question set around a piece like this:
-What’s wrong here?
-What did the writer conflate?
-What did the writer miss, even if the data is correct?
-What opportunity did this writer have, but not take? What would you have done if this were your piece?
This article is a good candidate for all four questions. (The fourth question is my favorite.)
Some pieces I’ve subjected to this exercise in the past are almost woeful, getting basic facts about banking entirely wrong; others are so focused upon a political agenda item that they forego all logic and care in trying to sell personal and emotional opinion as fact.
But this example is not so blatant nor offensive. I don’t even think it’s badly intended.
Still, it manages to miseducate in ways that one less seasoned in foreign exchange, central banks and monetary policy might readily buy into.
It is a case of soft deception and specious linkage. It makes me wonder if the writer, on a very near deadline, endeavored to assemble several separate pieces of confetti into one piece of paper — or article — of proper length that sounded upbeat.
The puzzle pieces may have been legitimate separately, but context is also important. The pieces need not just be cut well. They cannot just look like they might fit together.
They have to be from the same puzzle. They have to fit together in real life.
In this case, much of the writer’s opinion comes through of what he wants to link or connect. But this is not an opinion piece.
He begins with a good idea. In my own words:
The dollar is very strong right now relative to other currencies, and this has plenty to do with foreign exchange traders viewing the US dollar as the safest and strongest currency on Earth.
That’s true. But rather than describing precisely how that works, as a scientist, engineer (or journalist) might, something very different happens.
The writer offers an assembly of random thoughts on the subject of a strong dollar. You’ll find sentences and data that are correct, but they are loosely arranged toward defending (Intentionally? Unintentionally?) a thesis that isn’t relevant.
This article assumes that the strength of a currency has to do with the world’s view of that country’s economy. Secondly, it assumes that a country’s economy is all about who its leader is at that moment in time.
Specious?
This all seems plausible, of course, but a strong currency is often an operational and systemic matter.
A surging dollar may or may not have to do with economic data or who is President. It will definitely have to do with choices made by Central Banks and foreign exchange traders, in tandem with each other. Such decisions create the conditions within which a President may act.
This piece seems to convey that it’s the other way around.
Before we look at the article, let’s start with this basic launch point.
The US dollar is indeed strong right now.
If other currencies, due to deflationary fears, slowed credit growth or a need to improve exports, are being deliberately weakened, then another must be strong and go up. That is how the seesaw works. It’s a coordinated system. A machine.
Machines do not have loyalties to economies, countries, or leaders. Systems don’t get hung up about this President or that one.
In the oft-repeated words of a former boss of mine who served during the Bill Clinton administration,
“The system doesn’t know what a President is.”
A better thesis, and one more accurate to today?
The foreign exchange markets are watching Central Bank actions over and above the actions of sovereign economies, and Central Banks are coordinated around a strong US dollar, for a number of reasons.
Foreign exchange traders are behaving operationally and technically in a global system going through shift.
In such a context, it becomes less important to look at individual countries or their within-border jobs or GDP numbers.
Traders are creating and capturing opportunities around the carry. Who is borrowing in what currency to lend in what currency? They are watching the connectors: Capital flows, their timing and speed. Hot flows here to there and back, or potential hiccups in the short term which may require targeted operations to cover.
All of these factors are immediately relevant to a currency trader. A jobs number or a GDP number will come into modeling over longer trade trajectories, of course, but even then, these numbers are not attached to the leader of one country. They are related far strongly to the perceived pathway of the currency’s associated Central Bank. A currency trader may or may not think about Barack Obama over the course of his or her day.
But he or she is most certainly thinking about Janet Yellen.
I’ll share a few excerpts from Mr. Thomas’s article, with comment.
The opening:
“President Obama’s handling of the economy may be reviled by his political opponents, but he is receiving support from a surprising quarter: foreign exchange traders.”
The sentence is a non sequitur. What do these two sentence halves have to do with each other? Before you answer, put on your seatbelt. The next sentence is a surprise.
“In part, this bullish mood is tied to signals from the Federal Reserve that it will soon stop its bond-buying program — a change that would lift interest rates and buoy the dollar.”
Now I’m confused. The halt of QE and a cessation of monetary accommodation would technically be associated with a strengthening of currency, yes. But such policies are associated with President Obama’s political opponents.
So let’s recap. President Obama is reviled by his political opponents. But the dollar is going up, because foreign exchange traders are preferring it over other currencies as the definition of “safe.” This strength is related to decisions made by the Fed, and the Fed is moving toward ending QE, just as President Obama’s more rightward opponents have advised.
The writer doubles down on the virtuous opponents here, on “fiscal responsibility” and “energy exports” as part of the improving picture:
The increasing push by investors into the dollar can be seen as a favorable report card on the United States economy, highlighting good performance in crucial benchmarks such as growth and fiscal responsibility, and an increasingly competitive position abroad because of a boom in energy exports.
But I have a better idea.
I would have jettisoned the political narrative entirely. The Fed has acted, and it did not do so under Republican advice. Or Democrat advice. Or the advice of President Obama.
Chair Yellen, along with the FOMC she chairs, is acting as a globally recognized economist.
Endeavors to overlay a petty political narrative on a post about markets and central banks are not only unnecessary, they are inaccurate. (Considering the qualifications present on the FOMC currently, I’d even call such endeavors insulting.)
Perhaps the writer could have indicated that while current hawkish tendencies (said another way, rules based preference, or conservative preference rather than accommodative) are boosting the dollar, the clearly discretionary leaning of the current FOMC may or may not exhibit different preferences as soon as next year when two key hawks (Charles Plosser, Philadelphia Fed President and Richard Fisher, Dallas Fed President) depart the Committee.
An analysis could also note that the Fed’s shift to macroprudential policy focus takes it past “monetary only” methods.
Chair Yellen has already overseen gradual expansion of the Fed’s role towards meeting current objectives. Might this affect the realm of fiscal policy? (Yes.) The writer could have considered what choices this gives President Obama, (or any near future US President, since 2017 is nearby) in the *fiscal* realm.
It could be said that President Barack Obama has fewer and/or different choices than say, Presidents Bill Clinton or George W. Bush had.
This would be a worthy analysis, one which could have guided the reader past the strong US dollar into how changes in the role of the Fed affect a US President’s agenda vis a vis the economy.
For example: Does a macroprudentially focused Fed now have a greater role in fiscal policy than Congress?
If that’s the case, then battles the President appears to have with Congress are far less relevant to economic growth. Such a thesis could have been presented and tested by this writer, and follow on article opportunities would have been plentiful.
It would have been an opportunity to educate a “non-financial” audience about the choices faced by leaders trying to reinvigorate a post-crisis economy. It could have done so without reversion to political agendas.
Another excerpt, and another opportunity:
“Yet the recent rally in the dollar — it has gained about 3.2 percent against the euro since Aug. 20, and about 8 percent against the yen since July 1 — underscores expectations that the United States economy will continue to grow at a faster clip than that of Europe, Japan and even large emerging markets, all of which are seeing their economies stagnate.”
Yes, but these economies are systemically connected.
Looking at them as individual planets, making siloed comparisons, is missing the point, even if these numbers are accurate.
Context needs to be accurate as well. I was surprised to read this, especially as the writer also says,
In today’s global, highly interwoven economy, currency moves can be deceptive and fleeting.
That’s true, but in a global highly interwoven economy the numbers the writer offered above are necessarily not siloed. The writer seems to contradict himself here. Are the moves meaningful in terms of the fundamental data, or aren’t they?
“As long as the U.S. continues to grow and the rest of the world remains stagnant, the dollar will rally,” said Stephen L. Jen, a former economist for the International Monetary Fund who runs a hedge fund in London.”
Stephen L. Jen makes a technical, valid if/then about the dollar rallying. But it appears to be misunderstood in this article as evidence that fundamental, not technical factors are dominant in affecting currencies.
A more helpful analysis might have looked at complementary policies effected by central banks, and considered why these decisions were made, and how they affect individual countries — and their Presidents — after the fact.
Key point: Both the euro and yen are currently amidst deliberate devaluation versus the US dollar.
The numbers the writer shared reflect the coordinated activities of a number of Central Banks, all of which are watched very closely by foreign exchange traders. They are not simply and solely direct reads into fundamentals.
A better analysis might have asked,
“Why is US getting the top role, and why aren’t ECB and BoJ challenging that?”
The answer: Because right now, it is optimal for all parties that they do not.
Each is coordinating in a fashion to benefit their and each others’ positions.
In such a context, the widened — but managed — gap between the currencies is purposeful. This is better understood as game theory than about the numbers being generated by the US economy vs. other economies.
Certainly traders consider the economic data, and comparisons between countries and regions and their willingness to provide an entrepreneurial, legal and regulatory framework conducive to perceived return on investment and eventual growth. But that data is secondary in sequence and importance to deliberate actions and operations around debt and currency.
The following may seem obvious, but it might not be to a reader of this NYT article with a non-financial background.
US Presidents do not direct the US Federal Reserve.
This article mentions the heydays of Presidents Ronald Reagan and Bill Clinton, but fails to mention Fed Chairs Paul Volcker or Alan Greenspan. Both of whom acted ahead in situation and time of much of what was witnessed in the “muscular” US currency during the Reagan and Clinton administration timeframes.
They were not the only factor, and there’s plenty of good to say about how each of these Presidents handled what they were given.
However, Reagan and Clinton could have had very different situations to work with had it not been for the Fed Chairs mentioned. Take a moment to consider where Reagan and the US Dollar would have been without Paul Volcker making some really big decisions beforehand.
Hard to imagine, isn’t it.
A better narrative, fast forwarded to today, might ask how a stimulus-favoring President, now or in the near future, might address the reality that the Fed, and with it other global central banks, loom large in his/her decision making.
Or it could have asked how a President’s policy objectives are affected by a stronger or weaker dollar. The writer does briefly engage this topic, but by the time it appears the article has already gone in quite a few different directions. So it doesn’t link to the greater piece cohesively.
The following line appears to involve an editing error.
“The gains in the dollar even came on a day when stocks in the United States sustained a broad decline.”
I would have asked the editor to remove the word “even.”
The sentence then becomes accurate. “Even” seems to indicate the writer’s personal, emotional expectation that stocks and the dollar would go up together.
While the two can certainly coincide, they are not connected. It should not surprise this writer that they didn’t move in tandem on one single day.
Again, we have a strangely specious linkage made by one writer being surprised by one coincidence on one day.
But a non-financial reader might not realize that.
But perhaps this one was my favorite:
“Now, with the Federal Reserve cementing its role as a lender of last resort to central banks all over the world, the dollar is poised to recapture lost ground as the preferred currency for central banks.”
“Cementing?”
Word choices are important. So let’s run with this one.
If the Fed’s “cementing” this role, that means this role has been soft or undeveloped in times before.
A logical question: If the Fed is cementing this role in 2014, who has had it across the entire lifetime of most everyone reading this article?
The Fed.
The preferred currency for central banks?
The US Dollar.
Even more so than in certain times before. (See my comment just above about Paul Volcker again.)
The US dollar’s role as global reserve currency brings it both “exorbitant privilege” and exorbitant “dilemma.” It is both a revered role and one beset by tradeoffs between the needs of the US and the needs of the global system. Sometimes these needs coincide; sometimes the domestic needs have to wait.
A better analysis might have considered how a strengthened dollar and a weakened yen and euro would be affected if another currency, let’s say the yuan, was to be considered an alternative global reserve to the US dollar in a near future time?
How would this enhance or upset the delicate balance that has been struck, and how might this affect the choices and scope a US President would have in recommending his or her policies for the US economy?
My intent with this post, and the lecture that will follow it is to consider the roles foreign exchange traders and the role of Central Banks in a strong dollar.
This writer had several opportunities to talk about how both — and the strong dollar they’ve “created” — can interactively guide the policy choices (and challenges) of a US President in the current era. This opportunity was not taken. That’s unfortunate.
I fear that a less financially familiar reader may come away from this article with a less than accurate notion of how the entities, persons and institutions interact and take responsibility. As an interconnected system, in real life.
Image Sources
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Image Two: https://www.sevenstarfx.com/images/trade_forex.png
Image Three: http://mostmetro.com/wp-content/uploads/2012/11/Opinion-dollar-20confetti0.jpg
Image Four: http://si.wsj.net/public/resources/images/BN-CI780_0412dr_G_20140412140924.jpg
