Why would the dollar go down if equities go up? (I assume by "market" you mean equities.)
Tail wagging the dog... dollar or equities?
- Thread starter AyeYo
- Start date
Why would the dollar go down if equities go up? (I assume by "market" you mean equities.)
well, ABC company made $1 last year selling gumballs, $3 in revenue and $2 in business cost.
This year, the dollar is worth half as much. Everything that used to cost $1 now costs $2.
ABC company performs the same as last year despite the dollar value tanking. They get $6 in revenue, and spend $4 on business cost. The company is relatively the same in book value, but their earnings have gone up- since the dollar went down.
Hope this helps.
This year, the dollar is worth half as much. Everything that used to cost $1 now costs $2.
ABC company performs the same as last year despite the dollar value tanking. They get $6 in revenue, and spend $4 on business cost. The company is relatively the same in book value, but their earnings have gone up- since the dollar went down.
Hope this helps.
Thank you. This explains* why equities go up if the dollar goes down, but does not explain why would the dollar go down if equities are going up. That was my question to which I already know the answer, but you see: it was a rhetorical question to AyeYo's dilemma, so I can point him in the right direction.
We have a saying, these parts: Had you remained silent, you would have remained wise.
*It is of course a huge oversimplification, thus useless for anything tangible, but for theoretical discussions it'll do.
Rather than a weak $USD being the "salvation", it's much more likely to be the DESTROYER.
Energy prices UP
All commodities UP
TAXES UP as you're artificially pushed into higher tax bracket
Buying Power of your earnings and savings DOWN.
So.... why do our politicos pursue such destructive policies?
1. The oligarchy (currently Obama, Pelosi, Reid, Geithner, Bernanke, et al) DOESN'T GIVE A CRAP about us... "we the people".
2. They care ONLY about "how things look for the upcoming election"...
Energy prices UP
All commodities UP
TAXES UP as you're artificially pushed into higher tax bracket
Buying Power of your earnings and savings DOWN.
So.... why do our politicos pursue such destructive policies?
1. The oligarchy (currently Obama, Pelosi, Reid, Geithner, Bernanke, et al) DOESN'T GIVE A CRAP about us... "we the people".
2. They care ONLY about "how things look for the upcoming election"...
Excellent question.
The dollar is softening principally on worries concerning the deficit and the markets are being engineered up on the largest "carry trade" in history principally to reload the banks and offer an offset to foreign creditors.
Commodity currencies are simply reacting to the conversion of offshore dollars into items of value iron ore, coal etc.
This is all positioning in front of the upcoming inflationary period which will be created to reduce the impact of the growing debt.
However, as the Japanese will explain, no matter how clever you think you are, things have a habit of not turning out according to the plan, especially as is the case in US where nobody really knows the size of the debt or the prevailing mood of the consumer.
"The dollar is toast" is the catchcry and maybe true in the future.
But in this moment "toast" is still the last supper in the same way that the dollar is still the haven of last resort.
Your dollar/equity question is both complicated and simple and the outcome remains, as always, entirely unpredictable
NO. Neither!
If you flip a coin, is it the tails side that is moving and causing the heads side to move? or the other way around?
The question doesn't even make sense, right? Same thing.
In other words, it's a single trade, and it either gets bigger or smaller.
And it's real important to understand that. It's all one big liquidity function right now.
There are risk assets. And there is the funding source. It's a consequence of the world's reserve currency - the dollar - becoming the cheapest currency (of the US having rates at 0% and signalling that no one is at risk of this changing "for an extended period").
Risk assets are being inflated by ease of financing leverage and confidence that capital will continue to be cheap or free.
If "it" unwinds, meaning that people start to pull positions and delever, it will be a process of "buying dollars" with other assets, and closing out the debt. Right now it is a process of borrowing dollars and then "selling" them for other assets.
Crude, gold, emerging market bonds, equities, copper, everything is moving together as the other side of that expanding liquidity function.
Of course not all push and pull is tied to this, but it's become such a big core position theme across markets that everyone managing capital knows about it, so they trade accordingly:
When there is bad news, traders buy dollars and short risk assets because they know it could spark a rush by heavily leveraged funds in the direction of unwinding. In fact, it could get ugly if starts to unwind fast because as the assets get cheaper and the dollar gets more expensive, it gets more and more painful to exit, kind of like a short squeeze. Probably won't happen, but who knows.
Point is, it's not one causing the other. It's a single trade, and it either gets bigger or smaller.
It almost does seem as if it all moves together. I was watching the Dow and AUD/USD on Friday. They moved identically. And I don't mean just in the same general direction. They even had similar move size. When the Dow jumped, AUD jumped. When the Dow stumbled, AUD stumbled. Dow went sideways, AUD went sideways. Across all time frames they moved identically.
This implies that the US equities market and all the world currencies taken together is the same size.
That's not the case.
The latter market is much bigger.
(Philosophically sure it may be said that it is not the moon that is turning around the earth but they are together travelling on a complex orbit.
For everyday purposes this makes things unnecessarily complex.)
If there is not too much pressure on them equities markets can move to a certain degree independently of the currency markets.
As soon as pressure increases (like very good or very bad news) equities get much more in sync.