Strongdollarandworldtrade

One data point which has suddenly shot up in prominence in last two months is the US Jobless claims number which come out weekly every Thursday. Both its frequency and recency make it a clear mirror of the economic situation of the world economy in general, and the US in particular. Yesterday’s print of 2.98 million for the week ending May 9 was more than the consensus estimate of 2.5 million. The cumulative number now stands at 36 million since the start of the pandemic. The US stock markets, though, ended higher for the day by close to 1.6% led by a late rally in the banking stocks. US 10 year yields trade mostly unchanged around 0.62.

In other important news, US President Trump says that he is fine with a strong US Dollar. Now this is an interesting development as we know that President Trump has been a very vocal advocate of weak dollar policy. His constant criticism of Powell in the past was hinged on two pillars, one was that the interest rates are too high. He used to cite the example of Europe and Japan where the negative interest rates allow the borrowers to actually get paid for borrowing. The other pillar was that US dollar is too strong and that hurts the US exports very badly making them uncompetitive. As the virus would have it, the first grouse area of high interest rates has been amply attended to by the Fed in the recent days by taking it to almost zero. It still isn’t in the negative domain as the President would have liked but still it is at zero. Trump’s about face on the second grouse area of a strong US dollar requires further detailing.

In the current pandemic situation everyone is scurrying for dollar safety. The shortage of dollars has been the one constant theme in the markets. What such a stampede for the dollar allows is that the US can borrow very cheaply from markets. Even when the market sees that the US Fed’s balance sheet is increasing in size as it continues to buy all type of assets including government bonds and floods the market with newly printed dollars (printing is a misnomer, they get created digitally), the clamour for holding dollars doesn’t stop. We have debated long on why this is a unique phenomenon applicable only to the US in our previous columns. The fact that it is a uni-polar world which was created after World War II and was then consummated post the Soviet collapse. But what makes the US President flip his position? May be he is convinced that in a new world the export driven model has become obsolete. India’s self reliance war cry could have played a part, who knows! But in case the world’s biggest consumer economy becomes intransigent towards global trade it is not a good sign for many countries.

Domestically we had the second set of announcements of targeted relief measures by the government. It appears that the immediate impact of the announcements on the government fiscal position will be limited, this position supports the bond market. Old 10 year benchmark bond trades at 6.05 currently. Stock markets closed on a negative clip in the trading yesterday and have opened in further in the red today. The Rupee trades at 75.48. Gold is trading at 1730 $/oz.