Talking to Ambrose about the overvalued dollar

The Telegraph’s  has an excellent article on the sharp sell-off in the dollar this week. Ambrose quotes me in the article:

Lars Christensen, from Markets and Money Advisory, said the Fed made a grave policy error last year – long before its first rate rise in December – by talking tough and pushing up the dollar.

“They have been looking at notoriously lagging indicators like jobs and downplaying the forward market indicators, like equities and the yield curve. This is a repeat of what they did in 2008. The US is very likely heading into a recession, and the data may start to show this soon,” he said.

It is unusual for the Fed to tighten at a time when the manufacturing index is below the boom-bust line of 50 and nominal GDP growth is trending down, falling to 2.9pc from 4.8pc in late 2014.

Mr Christensen said the Fed’s policy had unwisely compounded the crisis for the whole “dollar bloc”, including China, Hong Kong, the Gulf region and a string of states with dollar ties.

I might be overstating the risk for a US recession and it might be slightly premature to call the recession, but if I would take a bet on this I would certainly be positioning myself for a US recession in 2016.

In terms of the US dollar I am actually a bit split. I think it is quite clear that the dollar is overvalued in real terms against most currencies in the world. However, that does not mean that the dollar should weaken right now.

That to a very large extent dependents on when the Federal Reserve will realize that it has made a policy mistake. My bet on that is that the Yellen’s Fed will remain stubborn for a bit longer and as a consequence keep monetary conditions too tight and postpone monetary easing for some time.

However, the fact that the Fed now certainly has tightened monetary conditions too much and as a consequence might send the US economy into recession in the coming quarters soon or later will cause the Fed to dramatically change course (or at least I hope so!)

Therefore, I think it is a good bet to say that the dollar will be significantly weaken in 12 months than today.

PS I have no clue how the US labour market numbers will come out today and fundamentally I think the labour market data is a pretty worthless indicator of what is going on in the US economy, but since Janet Yellen is obsessing about the US labour market then I guess that I will have to have a look at the data later today…


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