As the news began to spread this morning about new agreement that was reached in the European Union, the value of the euro began to rise against the US dollar. When the market closed on Monday, it took only about $1.1450 to purchase one euro. On Tuesday morning, the cost had risen to about $1.1500. On Wednesday morning, the price was close to $1.1600.
The US Dollar Index (DXY) closed at 95.82 on Monday. It closed at 95.19 on Tuesday and opened on Wednesday near 94.95.
One has to go back a long way to find levels like these. For example, in terms of the euro, one must go back to September 30, 2018 to find the price of one euro at $1.1600. And in terms of the dollar index, one goes back to August 1, 2018 to find the index at 95.14.
It seems as if sentiment has shifted against the dollar, and the latest shift seems to be connected with the place Germany now resides and the new initiatives taken by German Chancellor Angela Merkel to move the European Union closer to a fiscal union.
Although a lot still needs to be accomplished, the efforts of the past five days seem to offer some hope that the community will move more in this direction.
Moving Against The Dollar
The movement against the dollar is not of recent origin. On February 20, 2020, the price of one euro was $1.0667. The price has been rising ever since. But the story is a longer one than this.
At the time Donald Trump was elected president, the price of one euro was somewhere around $1.1550. Around the time Mr. Trump was inaugurated, the price was around $1.0625.
Then Mr. Trump stepped up talk about getting “a weak dollar” in order to spur along US exports and reduce the trade deficit of America. The dollar began to decline with this talk. By February 2018, it cost a little more than $1.2500 to acquire one euro.
A Change Occurs
Then, a change occurred. On February 5, 2018, Jerome Powell was sworn in as the new Chairman of the Board of Governors of the Federal Reserve System. From early January 2018 until, say, April 20, 2018, the Dollar/Euro exchange rate remained in the $1.2200-1.2500 range.
Then the value of the dollar began to rise, and continued to rise into February 2020. The reason for this is that Mr. Powell and the Federal Reserve took over and dominated the government’s economic policy.
Mr. Trump got his tax reform package passed through Congress in December 2017, but then Mr. Powell came to dominate economic policymaking. And Mr. Powell wanted to keep a lid on things, get interest rates back into a “more normal” range and keep the economy on a steady track. And this is exactly what he did. The foreign exchange market got behind Mr. Powell, and the value of the dollar began rising in late February 2018 and kept on rising.
Every time it seemed as if Mr. Powell and the Fed might waver, the value of the dollar fell a little bit. But as soon as Mr. Powell reassured traders that he meant to stay on his course, the dollar strengthened again and continued to rise in value.
The Coronavirus Pandemic Arrives
Things were going along just fine. Market trust of Mr. Powell and the Federal Reserve remained high. And then the coronavirus pandemic hit and the economy reeled. In March, Mr. Powell moved to fill the financial markets with liquidity and to support world liquidity through central bank swaps. All this can be traced through my posts.
As I reported in June, foreign money had started to leave the United States in March 2020. Although this movement was modestly reversed in April and May, the outflow continued in June. Foreign “risk-averse” monies that had come to the United States over the past two years or so seeking a “safe haven” were now moving their money out of the country. The reason seemed to be a declining trust in the direction of the US government.
This is when we started to see the value of the US dollar begin to decline, as discussed above.
Where Is The Money Going?
Well, the money seems to be going to Germany and to Europe.
As I have just posted, under the leadership of Chancellor Angela Merkel, Germany
… acted early. It was ready with tests and contact tracing to ‘flatten the curve’ swiftly and limited its death rate to orders of magnitude lower than that of any other major Western industrial nation. Containing the virus allowed for a brief and targeted lockdown, which helped limit unemployment to only 6 percent.”
Ms. Merkel’s government has coordinated with all the German states to contain the pandemic and with fellow European Union members to establish a recovery fund for nations hardest hit by the virus.”
Germany seemed to have done its job, and done it well, and was now moving on to help others. This has gained a lot of attention in the investment community, and it seems as if the money is now flowing out of the United States, which has lost a significant amount of trust, and is moving back into Europe, as confidence in the leadership there has risen.
Confidence Is Moving
Further indication of the change in “risk-averse” money flows, we see the value of gold rising to $1,841.30 per ounce at the close today, and some analysts are saying a new historic high will be reached soon (current historic high is $1,917.90). The price of silver has been rising and closed at $21.570 today. Furthermore, the price of oil rose by over $3.50 a barrel today – a rise of almost 9 percent.
It seems as if money is heading for safe havens, and the United States is no longer a sure thing on that list. Germany seems to be the choice right now over a very distrusted United States. Keep an eye on the dollar to see what the financial markets are trying to tell us.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.