No. of Recommendations: 20
I would not bet the rent on it, but if the high US tariffs last then I would expect the direction of the US dollar to be up, not down as we saw as a first reaction. Along with the more obvious results of a weakening US economy, rising inflation, and falling equity prices.
...
I did not understand this part. Rising inflation should weaken the dollar unless the Fed raises interest rates commensurately. If there is a massive recession in US and rising unemployment, then they won't. Perils of their "dual mandate".
Unless you're saying that other countries would be much worse off than US, and their currencies will fall in relation to a US dollar whose purchasing power goes down less.
It is hard to be sure how it will all unfold, as there may be lots of economic bullets flying through the air. Ignoring what ELSE might happen, if large US tariffs stay in place, then US imports will fall because they are a lot more expensive for US consumers, rather obviously. With fewer imports, US buyers don't need to keep buying non-US currencies to pay for that stuff.* With lower demand for non-US currencies, the US dollar rises. Note that the US dollar rose all through 2018-2019 as the steel/aluminum and then China tariffs took effect. That might be a coincidence, but it's consistent with theory.
There have been policy people in the US government orbit discussing methods to drive the dollar down, to counteract this effect. I don't think the methods they are talking about will be particularly successful, though the utter disgust with which the world sees the US, new a clear adversary of "the west", means that fewer people trust or want to hold the dollar (me included), so maybe that part of the "plan" is working. Calling it a plan might be a bit generous, but the effect is there for the moment: the US dollar is down a fair bit this week, despite the normally expected effect of US tariffs.
In cheerier news, my remaining Berkshire long puts and short calls look nice. My overall portfolio is up 1.6% so far today. Mr Buffett always advises never to bet against the US, but perhaps that should be "almost never"?
Jim
* yes, a huge fraction of international trade is denominated in US dollars, but that's just the bookkeeping. A firm in the Netherlands exporting goods to the US with a US dollar invoice immediately sells the dollars to buy euros, so in terms of currency pressure it's the same as if the invoice and payment had been in euros
