The dollar is at six-month lows. I said this would happen. At the beginning of the year and even late last year, I said to sell the dollar.
I explained a number of times how people had it all wrong about rate hikes and exchange rates. Rate hikes are not bullish for currencies. They are price increases and they are also de-facto fiscal expansions. If the Treasury announced that it was going to increase deficit spending, speculators would be all over the dollar. Yet that's exactly what happens when rates are increased. It's a fiscal expansion. The government spends more, all else equal. It "prints money."
The "inflationistas" never understood that. That's why they lost everything when the Fed lowered rates and engaged in asset purchases. The dollar didn't crash as they said it would. Rather, it took off, because those things are literally money "un-printing." Rate hikes are the opposite: they're money printing.
Furthermore, rate hikes are price increases, as I said. They raise the general price level, and that is not currency bullish. The most basic definition of inflation is that your money buys less. If you understand that, then there is absolutely no reason for the currency to fetch more in foreign exchange markets when it has been "inflated."
Where are all the dollar bulls now? We've had three rate hikes. In December 2015, the first time the Fed lifted rates, dollar/yen was at 121. Now it's at 113, and that's even with a big rally over the past month. The euro is rising. The dollar is even falling against the British pound, despite the fact that Brexit fears still linger.
I want to talk about the euro. Last year after the Brexit vote and again following the Trump victory in November I said that the euro would trade lower. I said that the advance of populism and nationalism would raise political risk for the survival of the EU as it currently existed.
I was right at the time. The euro traded down to near parity against the dollar. With the French election, however, and the victory of Macron -- a pro-Europe banker -- political risk has been removed. Now what will drive the euro will be the deflationary and currency-supportive policies of the EU and the ECB. I am talking about austerity, negative interest rates and continued asset purchases, which amount to nothing more than income stripping -- euro removal.
There is nothing stopping the ascent of the euro now. There will be no fiscal expansion except, maybe, the end of asset purchases by the ECB at some point down the road. Of course, that will be interpreted as bullish for the currency even though, ironically, it's not. But that will be minor.
With regard to any really bearish developments for the euro, such as a relaxation of deficit caps or an outright end to austerity and a major fiscal expansion, you can forget it. That's never going to happen.
The euro, therefore, will rise and rise and rise. I can see the euro going to $2 U.S. dollars. Easily. Maybe not in the short or medium term, but eventually. What is there to stop it? Nothing.
The euro will again become the biggest problem of the EU, but in a reverse sense. Not in the sense that it will go away and destabilize the very structure of monetary union, but rather in the sense that it will become too strong for its own good.
What I have said for a long time in these columns is that the people of Europe, while opposed to austerity and the policies dictated to them by the banks and finance capitalists, they somehow do not see the euro as being part of the problem. They can't connect the dots and understand that their misery has everything to do with giving up currency sovereignty, of becoming currency users as opposed to currency issuers.
They may never get it, but now they're in for a different ride, the first part of which will feel good and seem like a vindication of their choices. It just won't end up that way.