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The British pound, like most major currencies other than the dollar, has been under siege throughout 2022. And the situation deteriorated dramatically last week, when the U.K.’s new prime minister, Liz Truss, unveiled a spending plan to boost economic growth.
Investors fear the plan—which will require £45 billion in new debt, and includes the largest tax cuts seen in the U.K. in 50 years—will only serve to exacerbate inflation, undoing the work of the Bank of England’s interest rate hikes.
Despite a negative reaction from markets last week to the new fiscal measures, U.K. Chancellor of the Exchequer Kwasi Kwarteng said over the weekend that there’s “more to come” on tax cuts, sending the pound tumbling to a record low against the U.S. dollar on Monday.
The once-dominant pound sterling is now down more than 21% this year compared to the dollar, and it’s not the only foreign currency that’s struggling. The Japanese Yen is also down roughly 20% on the year vs. the dollar, while the Euro and the Thai baht are both down more than 15%.
As Fortune previously reported, investors looking to protect their capital in these trying economic times see the greenback as a safe haven, because the U.S. economy is “the cleanest dirty shirt,” according to Eric Leve, chief investment officer of the wealth management firm Bailard.
But economists warn that the dollar’s strength can also be a nightmare for the global economy.
“What is clear is we have this relentless increase in yields, this relentless appreciation of the dollar. They are both bad news for corporates and for the economy,” Mohamed El-Erian, the president of Queens’ College at the University of Cambridge, told CNBC on Monday.
Echoing Leve’s comments, El-Erian explained that with “fires burning” all over the developing world—and now even in places like the U.K—the dollar is the currency of last resort for investors.
“The reason why this last leg up in the dollar is happening is because we are the safe haven and one consequence of that is our currency gets stronger,” he said.
This isn’t the first time that El-Erian has warned about the potentially disastrous implications of a rising U.S. dollar.
In a Sept. 6 Washington Post op-ed, El-Erian explained that a strong dollar can be a “mixed blessing.” On one hand, the strength of the greenback helps to reduce U.S. inflation, but at the same time, when the dollar remains persistently strong, it can bankrupt developing nations as their dollar-denominated debt costs soar.
That’s exactly what happened in the Latin American debt crisis of the 1980s. Developing nations in Central and South America amassed billions in dollar-denominated loans with low-interest rates throughout the 1970s. Then, when the U.S. raised interest rates dramatically to fight inflation beginning in1982, debt costs soared sparking a crisis that plunged Latin America into a “lost decade,” according to the Federal Reserve.
And El-Erian warns that a strong dollar can have a number of devastating effects outside of emerging market economies as well.
“The longer and higher the dollar soars above the rest, the greater the risk of more prolonged global stagflation, debt problems in the developing world, more restrictions on the free flow of goods across borders, greater political turmoil in fragile economies and greater geopolitical conflicts,” he wrote in his Washing Post op-ed.
On Monday, El-Erian also noted that the recent strength of the U.S. dollar only adds to three key paradigm shifts that have made for an “uncomfortably high probability” of a global recession.
The top economist broke down these shifts in his latest Bloomberg op-ed over the weekend.
First, he noted that central banks around the world have moved from supportive to restrictive policies practically in unison to counter inflation. Second, he explained that global economic growth is “slowing significantly” as the world’s three most important economies, the U.S., the E.U., and China, all continue to lose momentum.
And finally, he said that the process of globalization that helped bring about a deflationary trend worldwide over the past two-plus decades is now fading because of “persistent geopolitical tensions.”
In his interview with CNBC on Monday, the top economist explained that these paradigm shifts have only been made worse by government policies, and called on policymakers to stop adding to the volatility, hinting at the new U.K. tax cut and spending plan.
“It’s not just about the big paradigm shifts,” El-Erian said. “This is about governments and central banks being sources of volatility rather than volatility suppressors. They are adding to the volatility, that’s particularly clear with the government in the U.K., but also in the U.S. with the Fed…it is quite a mess in some of these markets and these are the main markets for the global economy.”
This story was originally featured on Fortune.com
The Wall Street Journal
Stock futures wobbled on concerns about the world economy, while the British pound tumbled after the U.K. government said it would double down on cutting taxes. + _**Futures for the S 500, Dow industrials and Nasdaq-100**_ flitted between small gains and losses. This suggests investors aren’t ready to buy back into a market that fell sharply Friday. + _**U.K. assets slid further**_ after Chancellor of the Exchequer Kwasi Kwarteng said in weekend interviews that the government would cut taxes aga
It’s the worst ever collapse of the pound but far from the first. Here’s a look back at them, all the way back to 1971.
Before 2022, there was 1976, 1985, 1992 with George Soros (remember him?), and of course, 2008 and 2016.
With inflation “unacceptably high,” the Federal Reserve should lift rates higher and keep policy restrictive for some time, Cleveland Fed President Loretta Mester said on Monday — and if there is an error to be made, better that the Fed do too much than to do too little. “When there is uncertainty, it can be better for policymakers to act more aggressively because aggressive and pre-emptive action can prevent the worst-case outcomes from actually coming about,” Mester said in remarks prepared for delivery to the Massachusetts Institute of Technology. Mester said she would be “very cautious” about assessing inflation, and would need to see several months of declines in month-to-month readings to be convinced it had peaked.
A NASA researcher pleaded guilty on Thursday to charges related to hiding ties with the Chinese Communist Party while accepting federal grant money. Zhengdong Cheng, who also worked as a professor at Texas A&M University (TAMU) from 2004 until he was fired after his arrest in August 2020, was originally charged with wire fraud, conspiracy and making false statements. As part of an agreement with prosecutors, he pleaded guilty to new charges of violating NASA regulations and falsifying official documents.
The recent rally in the U.S. dollar is creating an “untenable situation” for riskier assets that could end in a financial or economic crisis, strategists at Morgan Stanley warned in a note Monday. The wild swings in currencies are another pressure on the global economy and corporate earnings, which are expected to fall as the Federal Reserve’s aggressive interest rate hikes over the summer begin to weigh on spending. “The ultimate lows for stocks, and highs for yields, will likely be determined by the growth trajectory in earnings and the economy rather than inflation or the Fed,” analysts including Michael Wilson at Morgan Stanley wrote.
U.S. stocks closed lower Monday amid elevated market volatility, extending last week’s losses as the S&P 500 sank to a new 2022 low. The S 500 dropped 1% to end around 3,655.52, while the Dow Jones Industrial Average fell 1.1% and the Nasdaq Composite slid 0.6%, according to preliminary FactSet data. The SP 500 ended below its previous closing low this year of 3666.77 on June 16. Wall Street’s fear gauge has climbed amid fears over the Federal Reserve aggressively raising interest rates to fight
Investor’s Business Daily
On Monday, Recursion Pharma stock cleared an important performance benchmark, with its Relative Strength (RS) Rating jumping into the 80-plus percentile with an upgrade to 89, up from 76 the day before. When looking for the best stocks to buy and watch, one factor to watch closely is relative price strength. This unique rating measures technical performance by using a 1 (worst) to 99 (best) score that indicates how a stock’s price action over the trailing 52 weeks matches up against that of all other stocks.
Yahoo News UK
The prime minister and the chancellor have faced a barrage of criticism over their tax cuts plan.
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