Betting on the Falling Dollar

Summary

Podcast Summary: WSJ Your Money Briefing

Episode: Betting on the Falling Dollar
Date: August 7, 2017
Host: Charlie Turner
Guest: Chelsea Delaney (Wall Street Journal reporter)

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Episode Overview

This episode of WSJ Your Money Briefing dives into one of the biggest financial stories of the year: the notable decline of the U.S. dollar. Host Charlie Turner and reporter Chelsea Delaney discuss what’s behind the dollar’s slide, how investors have responded, and what this means for global markets, multinational corporations, and other economies. The conversation also considers what could trigger a reversal in the dollar’s fortunes and the ripple effects felt across sectors like exports and commodities.

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Key Discussion Points and Insights

1. The Dollar's 2017 Decline

• Extent of Decline:
  • The dollar is down about 7% for the year and has been falling for five months—a significant stretch (01:14).
  • "It's been down for about five months, which is a pretty long stretch for the currency." – Chelsea Delaney [01:20]
• Recent Volatility:
  • A brief rebound occurred following positive employment data, but the dollar remains weak (01:30).
  • "We had some good jobs data...so that sort of prompted a rebound. But today it's down a little bit." – Chelsea Delaney [01:30]

2. Investor Sentiment & Bearish Bets

• Shift in Market Position:
  • At the end of the previous year, there were $30 billion in bets on a stronger dollar; now it has flipped to $8 billion in bearish bets (01:53).
  • "Investors are now holding about $8 billion in bets against the dollar." – Chelsea Delaney [01:58]
• Causes:
  • Diminished expectations for U.S. interest rate hikes and slow progress on Trump administration policies (like tax reform) have weakened the dollar’s outlook (02:00-02:53).
  • "There just don't seem to be a lot of reasons to be bullish on the dollar right now." – Chelsea Delaney [02:50]

3. The Risks of One-Sided Bets

• Potential for Quick Reversals:
  • With many investors positioned the same way, small shifts can spark rapid reactions, like a short-covering rally (03:02).
  • "It can sort of create this snowball effect...everybody rushes to cover those bets really quickly." – Chelsea Delaney [03:12]

4. Winners from a Weak Dollar

• Impact on Multinational Corporations:

  • A weaker dollar benefits U.S. companies with significant export businesses, making their products more competitive abroad and leading to stronger overseas earnings when converted back into dollars (03:46-04:25).
  • "The weaker dollar is generally pretty good for companies that have a big exporting business...they get a big benefit whenever the do weekends." – Chelsea Delaney [03:48]

• Commodities:

  • Commodities priced in dollars become more affordable for foreign buyers, buoying commodity prices and benefitting emerging markets and exporters (04:25-04:44).
  • "A lot of commodities are priced in dollars. So if you're an investor overseas, it becomes more affordable. So that tends to BO prices." – Chelsea Delaney [04:27]

5. Losers from a Weak Dollar

• European and Japanese Exporters:

  • The strengthening euro (now near 1.20 USD, up over 10% this year) and yen hurt exporters, prompting downgraded earnings and slower economic growth projections for these regions (04:44-05:43).
  • "When their currencies strengthen, it really makes it difficult for their companies." – Chelsea Delaney [05:14]

• Stock Market Impact:

  • Some European and Japanese stock indexes have underperformed due to these pressures.

6. What Could Turn the Dollar Around?

• Possible Triggers:
  • Any hints of the Federal Reserve raising rates, better economic growth or inflation data, or progress on U.S. fiscal policies could reverse the dollar's slide (05:43-06:17).
  • "Just because of how negative sentiment is on the dollar, you know, a lot of investors think we could see a snapback in the currency." – Chelsea Delaney [05:55]

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Notable Quotes & Memorable Moments

• On shifting bets:

  • "At the end of last year, everyone was...expecting the dollar to go up. There were...around $30 billion in speculative bets on a stronger dollar and that's recently flipped." – Chelsea Delaney [01:53]

• On market corrections:

  • "It can spark a short covering rally type thing." – Chelsea Delaney [03:17]

• On corporate benefits:

  • "A weaker dollar will probably help us out down the line." – Chelsea Delaney [04:19] (paraphrasing multinational corporate commentary)

• On the euro’s surge:

  • "It is around 120. It's a little bit under 120. It's gone up a lot this year. I think about over 10%." – Chelsea Delaney [04:53]

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Timestamps for Important Segments

• 00:38 — Introduction and context for the dollar’s decline
• 01:14 — How much the dollar has dropped
• 01:53 — The swing from bullish to bearish investor positions
• 02:53 — Risks of market overcrowding and potential for sudden reversals
• 03:46 — Positive impact of a weak dollar on multinationals
• 04:25 — Boost to commodities and emerging markets
• 04:44 — Negative effects on European and Japanese companies
• 05:43 — Factors that could strengthen the dollar going forward

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Summary and Takeaway

The episode delivers a concise yet comprehensive analysis of the dollar's sharp drop in 2017, its effect on global markets, why investors are piling into bearish bets, and who benefits or suffers as a result. Listeners come away with a clear understanding of the dynamics shaping currency markets and the delicate balance that could tip the dollar’s fortunes in coming months.

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Transcript

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[WSJ Announcer]

This is yous Money Matters from the Wall Street Journal.

[Charlie Turner]

Welcome to YOUR MONEY matters. I'm Charlie Turner in New York. One of the biggest business stories this year has been the decline of the dollar. The greenback had rallied briefly last fall following President Donald Trump's victory as the market counted on policies such as tax cuts and infrastructure spending to boost the economy and the dollar with it. But the dollar has been going through one of the worst stretches in years, pressured by weak inflation and dou interest rates anytime soon and investors expect the dollar will keep on sliding. Joining us is Wall Street Journal reporter Chelsea Delaney. Chelsea first, how far has the dollar fallen this year?

[Chelsea Delaney]

Well, the dollar is down about 7% this year. It's come back a little bit over the past couple days, but it's been down for about five months, which is a pretty long stretch for the currency.

[Charlie Turner]

And it rose Friday, I guess, on good economic news, namely the employment report. Right?

[Chelsea Delaney]

Yeah. So we had some good jobs data and there were some good inflation numbers that were part of that data. So the people have been very negative on the dollar. So that sort of prompted a rebound. But today it's down a little bit

[Charlie Turner]

and you write about how a lot of investors are counting on the dollar to keep going down. Talk about the billions of dollars in bearish bets against the dollar.

[Chelsea Delaney]

Right. So the market has gotten really negative on the dollar over the past couple months. At the end of last year, everyone was the market was really one sided and expecting the dollar to go up. There were I think around $30 billion in speculative bets on a stronger dollar and that's recently flipped. Investors are now holding about $8 billion in bets against the dollar. There's a pretty broad consensus among investors that over the medium to long term, the dollar will be declining. A lot of that is the path for interest rate increases is. And a lot of what people were expecting to boost the dollar was from the Trump administration, fiscal stimulus, tax reform. And so that also has gotten sort of held up in political wrangling. So there's just for investors, there just don't seem to be a lot of reasons to be bullish on the dollar right now.

[Charlie Turner]

So I guess they figure it's going to stay like this for a while. Of course, a change in the economy, a change in pretty much anything will I guess cause them to scramble to cover their bets.

[Chelsea Delaney]

Yeah, so when markets get sort of positioned in this way, have a lot of people betting on the same thing. People are now just betting on a weaker dollar and a stronger euro and a weaker yen. It can sort of create this snowball effect when something small happens in the market, everybody rushes to cover those bets really quickly. And so it can spark a short covering rally type thing.

[Charlie Turner]

I'm speaking with Chelsea Delaney of the Wall Street Journal and you're listening to youo Money Matters. Thanks for listening, everyone. Chelsea, let's talk about what the falling dollar does as far as benefits are concerned. Hasn't the falling dollar pushed investors into things like stocks of multinational corporations who benefit from a weaker currency?

[Chelsea Delaney]

Yes, definitely. So the weaker dollar is generally pretty good for companies that have a big exporting business. Companies like P and G, Coca Cola, any big multinational, they get a big benefit whenever the do weekends because their products become more competitive overseas. And the value of what they sell overseas, it becomes more when they translate it back. So they've recently started a lot of companies in this most recent earnings season we're starting to reference. A weaker dollar will probably help us out down the line.

[Charlie Turner]

Doesn't a falling currency also help commodities?

[Chelsea Delaney]

It does, yes. A lot of commodities are priced in dollars. So if you're an investor overseas, it becomes more affordable. So that tends to BO prices. And that can sort of have a ripple effect on a lot of emerging market nations and commodity exporters. So that really can be helpful for them as well.

[Charlie Turner]

But it's bad news for say, European economies because it's really sparked a rise in the euro. What's the euro at right now roughly?

[Chelsea Delaney]

It is around 120. It's a little bit under 120. It's gone up a lot this year. I think about over 10%.

[Charlie Turner]

So I guess that's caused analysts and also European companies to downgrade their earnings estimates and also to downgrade economic growth in the eurozone.

[Chelsea Delaney]

Yeah, so the European economy, it's really reliant on exports. The same can be said of Japan. A lot of their companies have really big export businesses and when their currencies strengthen, it really makes it difficult for their companies. Some of the European stock indexes, some of the Japanese stock market stock indices as well, have been underperforming other markets this year just because those companies are going to face, you know, a tougher road. If they're, if their exports are suddenly

[Charlie Turner]

less competitive, what would cause the dollar to rise? I mean, would it be a rise in interest rates? People are still betting that the Federal Reserve will raise interest rates at least one more time before the year is out.

[Chelsea Delaney]

Yes. Yes. So just because of how negative sentiment is on the dollar, you know, a lot of investors think we could see a snapback in the currency, you know, more willingness from the Fed to raise rates. If we see better data on economic growth or inflation or if we see any progress from the Trump administration on tax reform, those could all, you know, send the currency higher.

[Charlie Turner]

Wall Street Journal reporter Chelsea Delaney. Thanks a lot, Chelsea.

[Chelsea Delaney]

Thank you.

[Charlie Turner]

And that's yous Money Matters. I'm Charlie Turner at the Wall Street

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