Following a sharp 10% rise in the value of the U.S. dollar earlier in the year, most dramatically during the stock market meltdown in Q1, the dollar has sold off by nearly -10% since. This pattern is not abnormal during periods of uncertainty, and reflects dynamics on both sides of the equation (it’s important to remember that currency movements occur in both directions).
Are the financial markets (‘Wall Street’) and the real economy (‘Main Street’) disconnected? Although they may appear to be disconnected on the surface, and near-term outcomes are impossible to predict, they’re likely no more disconnected than usual. One of the more important considerations to keep in mind about financial markets is that they’ve always been forward-looking.
With U.S. short-term interest rates again reaching the zero bound (fed funds rate of 0.00-0.25%), debate has surfaced again about moving the target range further—to below-zero territory. Several developed nations, mostly in Europe, moved down this path years ago, and now remain entrenched in it, with global slowing causing central banks to continue down an easing path. This is despite apparent regrets by some about doing so…
Have some financial asset prices bounced back too far and too fast? This is never simple to evaluate, as current prices for rates and risk assets have a behavioral component, and appropriate price levels may only be obvious in hindsight.