Two years ago I was sitting in the San Francisco airport. He was about to start an extended road show with a client of mine. We would be raising close to $50 million. We had meetings all over the United States, Canada and Europe. We would be on the road for a little over 2 weeks, and this was the turning point.
As always, I began to think about the future. Making sure flights were arranged, hotels booked, car services notified, customers contacted, accounts set up and documents delivered. The details were important. . . sometimes a small detail made the difference between a good meeting and a great meeting.
So I started thinking about London.
You would need 4 different coins on this trip, maybe five. US dollars for our leg through New York and Boston. Canadian dollars for expenses in Vancouver and Toronto. British Pounds for London. Euros for Paris. And if everything went well. . . we would have two meetings in Switzerland that would require Swiss francs.
Later that week I landed at London Heathrow airport. The first thing I did was take my US dollars to an exchange window where I gathered all the other coins I would need.
Trades like this are common in the world currency markets. Every day more than 2 trillion dollars are exchanged. To put it in perspective, that’s more business than all the stock markets in the world combined. Transactions like these happen around the world millions of times a day. Some are big and some are small, but all are still using ever-changing exchange rates.
The US dollar is the closest thing we have to a global currency. We have the largest economy in the world, and our greenbacks float around the world. Our currency is so popular that many countries set their exchange rates with ours.
In March, it was a terrible time for the US dollar. The dollar had been falling for several years in a row. Each mark down caused the demand for basic products to increase. I don’t have space to explain why, but trust me. As the value of the dollar fell, the world pushed more of its investments into commodities.
Oil prices were at record levels.
American consumers were paying more than $3.50 a gallon for gasoline, and it was only going to get worse. Prices were going up and up, and inflation was taking hold. It couldn’t be happening at a worse time. The collapse of the US housing market was dragging down financial institutions and banks. The economy was on the brink of a major implosion.
Then Bear Stearns filed for insolvency.
The company quickly wedded it to JP Morgan, avoiding certain disaster. That move alone saved US markets from collapsing. But the damage was done. The bad news pushed the US dollar lower. Every tick down in the US dollar seemed to push oil prices higher. Higher oil fueled inflation fears. And with the stagnant economy. . . we risk a return of stagflation.
In May, it looked like we had bottomed out with the dollar. Horrible economic news included rising commodity prices and falling consumer confidence. However, the dollar held firm. . . a change that few observed. We had hit rock bottom.
Global issues began to come to the fore.
In the middle of the summer some of the minor coins started having problems. The Bank of Vietnam devalued its currency, the “Dong”, by 2%. They also raised interest rates to 14% in an effort to curb inflation. In the last year Vietnam prices have risen over 25%, and you thought that was bad here in the US.
Then came news from India.
The Central Bank of India began to fight against inflation that was out of control. They recently raised interest rates more than 8% in an effort to curb inflation.
In June, the US dollar began to strengthen.
The Federal Reserve sets and keeps interest rates stable. This was the first time in 9 months that they left the rates unchanged. However, they continued with their tough talk about inflation. They noted that food and fuel prices were raising inflation concerns here in the US.
So enough economic news. . . what does this mean?
I learned two important things. First, by holding rates steady, the Federal Reserve signaled that the economy was still growing. It also meant that liquidity actions were helping to alleviate the credit crunch. The other key point was that inflation is a key issue.
This was a good news/bad news event.
Good news for the US dollar, as the natural antidote to inflation is rate hikes. Bad news for consumers, as we will have to see a continued strong push in inflation before the Fed will act. With the Fed now focused on inflation and the economy still shaky but stabilizing, the US dollar began a rally.
In the last two weeks we have seen a rally of more than 10% in the US dollar. . . something that I hope will continue until the end of the year.