mishtalk.com / Mike “Mish” Shedlock / July 19, 2017
Magazine covers tend to coincide with extreme sentiment. The Economist is particularly good at offering contrarian articles.
In December of 2016, The Economist nailed the peak in the US dollar with its “Mighty Dollar” issue.
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The dollar has been gradually gaining strength for years. But the prompt for this latest surge is the prospect of a shift in the economic-policy mix in America. The weight of investors’ money has bet that Mr Trump will cut taxes and spend more public funds on fixing America’s crumbling infrastructure. A big fiscal boost would lead the Federal Reserve to raise interest rates at a faster rate to check inflation. America’s ten-year bond yield has risen to 2.3%, from almost 1.7% on election night. Higher yields are a magnet for capital flows.
The trade deficit will widen as a strong currency squeezes exports and sucks in imports. In the Reagan era, a soaring deficit stoked protectionism. This time America starts with a big deficit and one that has already been politicized, not least by Mr. Trump, who sees it as evidence that the rules of international commerce are rigged in other countries’ favor. A bigger deficit raises the chances that he act on his threats to impose steep tariffs on imports from China and Mexico in an attempt to bring trade into balance. If Mr. Trump succumbs to his protectionist instincts, the consequences would be disastrous for all.
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