Stocks before the market: is the unstoppable rise of the dollar coming to an end?

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The history of financial markets and the global economy this year was written in part by the dramatic rise of the US dollar, the inexorable rise of which sent shockwaves around the world. Eventually, however, its breakneck rally may come to an end.

What’s Happening: The dollar has lost more than 4% so far this quarter, down from a two-decade high it hit in September. Last week, investors turned bearish on the greenback for the first time since July 2021, according to data from Societe Generale.

“Markets are eager for signs of a fundamental shift, and investors increasingly fear missing out as corrections after a spike tend to be quick and steep,” Goldman Sachs strategists said in the bank’s recently released 2023 outlook.

What has changed? First, there was the startling inflation data from the US, which showed that prices rose more slowly than expected in October. This has reinforced expectations that the Federal Reserve may curtail interest rate hikes soon.

(The sharp rise in rates this year has been one of the main reasons the dollar has soared. It has encouraged investors to buy US assets, which have increasingly attractive yields. To execute those transactions, they have to buy dollars.)

Second, there has been growing optimism that China may be preparing to ease its coronavirus restrictions. The government has also taken steps to address a crisis in the country’s real estate sector. Additionally, warm autumn weather in Europe has eased concerns about energy access this winter, leading to slightly more optimistic economic forecasts.

If these economies perform better than expected, the US won’t look like the only game in town and other currencies could look attractive again.

“You have a combination of clear signs that inflation is slowing in the US, clear signs that Europe may not have as bad a winter as we thought, and clear signs that China may be more focused on growth than it was in earlier,” Jordan Rochester, a Nomura currency strategist told me. He thinks it’s possible the dollar’s value has peaked against other major currencies.

Looking ahead: There are, of course, huge risks to the outlook. China continues to play hardball on Covid, even as investors desperately hope that President Xi Jinping will change tack soon. The dollar strengthened on Monday after a five-day lockdown was announced in a district of Guangzhou, a major transportation hub.

There remains great uncertainty about the Federal Reserve’s plans. And Russia’s unpredictable war in Ukraine still has the potential to quickly change the calculus for Europe.

“The dollar is unlikely to fall in a straight line,” Société Générale’s Kit Juckes recently warned. When it arrives, the peak will likely look jagged, he warned, instead of a crisp, clean “Matterhorn imitation.”

Why it matters: I’ve written about why the strong dollar has been extremely painful for other countries here. In short, a weaker greenback could make food and energy imports cheaper and ease the pain for dollar-debt governments. It could even reduce the likelihood of political instability, meaning many leaders will be watching what happens next.

In the wake of the spectacular FTX implosion, Coinbase CEO Brian Armstrong has been subject to a media blitz. His message: don’t put us in the middle of bad actors.

FTX “is not representative of every company in the cryptocurrency industry,” Armstrong said in a recent interview with CNBC, noting that Coinbase is US-based and publicly traded, meaning its finances can be closely scrutinized. The company even ran an ad in The Wall Street Journal, noting that it can be trusted as it calls for updated regulations.

Yet investors aren’t buying the message, as fears mount for the health of the entire cryptocurrency industry.

See here: Coinbase shares have plunged more than 20% in the past five days. They’re down 84% year-to-date.

Traders are also offloading the company’s debt. The yield on 2028 bonds, which trade in opposite prices, has jumped in recent days, hitting 15%. It was close to 11% at the start of the month and was below 5% at the start of the year.

Bank of America lowered its price outlook for Coinbase stock late last week. Analyst Jason Kupferberg said that while he is confident the startup won’t face the same fate as FTX, “that doesn’t make them immune to the broader fallout within the crypto ecosystem,” as regulators back out and traders they retreat.

Bitcoin dropped below $16,000 this week. It has lost 66% of its value year-to-date.

A wave of hiring freezes and firings in the tech sector has produced an alarming array of headlines, my colleague Nicole Goodkind noted earlier this month. The list of affected companies is a who’s who of top players: Amazon, Apple, Meta, Stripe, and, of course, Twitter.

But Morgan Stanley doesn’t think this should be read as a warning sign for the broader American job market.

“Could the sector herald changes in job supply in the future? We don’t think so,” the bank’s economists and strategists said in a recent research note.

The team identified two reasons for this. First, they argue, the tech industry is huge when it comes to its stock market valuation, but it doesn’t actually employ that many people as a proportion of the total U.S. workforce. Using the broadest possible measure, it represents 9% of total employment. Tech layoffs, while significant, make up just over 0.1% of total US wage earnings.

Second, the tech world’s approach to hiring and staffing is different from the rest of the economy. Employment in the tech sector has “shooted sharply” above its pre-pandemic level, while others are only catching up.

One caveat: Morgan Stanley expects the US job market to weaken in 2023 as the economy slows. About 261,000 positions were added in October, and by next summer, the bank expects monthly earnings close to 50,000.

However, outside of technology, he does not anticipate mass cuts, especially given the ongoing staff shortage.

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