The current context remains based on growing expansionary impulses on the part of the major central banks (starting from the ECB which has already widely signaled the first rate cut in June) preceded by a mood on the part of the FED which is progressively becoming more and more restrictive.
It is inevitable that this situation has led to a drastic rethinking of the estimates on the trend of the dollar for this 2024, with the initial estimates that saw the greenback destined for a significant correction which quickly dissolved together with the accommodating attitude of American monetary policy makers, and with prospects that now see it as highly probable that the American currency conclude the year with prices significantly higher than those recorded at the end of 2023, further increasing the currency pressure on many areas of the globe, not least those most dependent on financing in dollars or on imports denominated in American currency, first and foremost all crude oil.
Partly explaining this change of pace in the dynamics of the dollar is obviously the American exceptionalism of an economic growth which, despite the high cost of money, seems destined to easily double that of the major industrialized partners, to which must obviously be added the component of diversification from risk in times, like the current ones, of high geopolitical uncertainty.
It was born like this the “smile” theory for the dollaror the one that claims that the American currency does exceptionally well in times when the American economy is in a boom phase, or alternatively in times when things are going extremely badly (due to the role of diversification from the risk associated with the reference currency world), while on the contrary the dollar tends to weaken in the middle economic phases which see generally moderate growth.
A big smile then what we see today in the dollar, given the current situation which sees high growth, high employment and returns in the USA decidedly above the Western partners (still this morning the two-year rate stood above 5%), without forgetting the perennial hesitancy associated with a fragile international political context plagued by at least two large-scale conflicts.
However, a smile that could soon disappear because if it is true that the expectations on the profits of the magnificent 7 are enthusiastic, as mentioned before the rest of the American companies (they do not seem to be doing so well, and even in the small circle of the untouchables some cracks are opening , for example, if we have to look at the collapse of Tesla’s operating profits (estimated in the order of 40% thanks to the now open downward battle on the prices of electric vehicles with its Chinese counterpart) or at the recent collapse in Nvidia’s prices.
By Michael PalatielloCEO and strategist of Wings Partners Sim
