How strong is your dollar? Or in other words, how much “stuff” can your dollar buy?
This question is increasingly important since currency manipulation is a common tool used to help manipulators gain an edge over other countries when economies underperform. So how does currency manipulation effect the U.S. economy and markets?
First, let’s take a look at China. This past summer, Chinese markets saw a huge market selloff, with the Shanghai composite declining more than 23 percent. The selloff was accompanied by underwhelming economic data and fears of slowing Chinese growth. So what is China to do when markets drop and economic numbers sour? Devalue currency, of course! And that’s exactly what the Chinese central bank did in August. Currency devaluation effectively makes Chinese goods easier for foreigners to buy since foreign currency, like the U.S. dollar, has more purchasing power.
This might be good news for the Chinese economy, but it is not welcomed news for a struggling U.S. economy. For example, we’ve seen shares of Apple Inc. drop over 13 percent in recent weeks partly because of China’s currency devaluation. Apple relies on Chinese consumers to buy its products, but since the Yuan is worth less, it is now more expensive for those consumers to buy Apple products and more difficult for Apple to sell its products.
Unfortunately, this is the same story with many U.S. companies doing business in China. Another challenge the U.S. faces because of the currency issue is the Federal Reserve’s timing of interest rate hikes. Since rate hikes in and of themselves can strengthen the dollar, the Fed risks constraining economic growth with rate changes.
clearTREND research produced by Appleton Group indicates downward trends in most market segments except the S & P 500 index, large growth companies and real estate. Its U.S. Economic Health Index shows that 42 percent of U.S. sectors are expanding while 45 percent are contracting.
“Lackluster U.S. economic data, a slowing Chinese economy and currency wars are just some of the things affecting markets”, says Alexander Hunt, advisor to private clients and retirement plans. “Nobody knows if recent deterioration signals a market top or if this is just another hiccup in a long bull market. It’s too early to tell.”
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