Since early 2009 (when the U.S. stock bull market began), the U.S. dollar has collapsed. The Brazilian real is up 56%, from 41 cents to 64 cents. The Canadian dollar is up 35%, from 78 cents to $1.05. The Swiss franc has also risen 35%, from 85 cents to $1.15. The New Zealand dollar is up 60%, from 50 cents to 80 cents, while the Australian dollar has risen the most, 70%, from 64 cents to $1.09, reaching a 29-year high. Even the relatively weak euro and British pound have risen by 16% and 20%, respectively, since early 2009.
In his widely publicized press conference last Wednesday, Federal Reserve Chairman Ben Bernanke deflected questions about the dollar to Treasury Secretary Tim Geithner, saying the dollar was Treasury’s domain. Theoretically that’s true, but the Fed’s seemingly unconscious attack on the dollar over the last decade has caused more damage to our currency than all of Treasury’s policies combined, or all of the over-spending by Congress and the combined Bush-Obama administrations of the past decade. Consider these four entirely unprecedented actions and policy decisions by the Fed in the last 33 months alone:
1. The Fed doubled its balance sheet in three months during late 2008. Fed borrowing rose from $411 billion on Sept. 10, 2008, to $1.76 trillion on Dec.10. Since then, gold has doubled.
2. The Fed lowered the Fed funds rate to a “range of zero to 0.25%” at the Dec. 16, 2008 FOMC meeting. This “Zero Interest-Rate Policy” (ZIRP) has now been reiterated for 18 straight meetings. The lack of any positive return on the dollar has driven savers and investors to higher-yielding paper.
3. After flooding the system with liquidity and penalizing savers, the Fed began a series of quantitative easing (QE) plans: 1.0, 1.5 and 2.0, with perhaps 2.5 to come. QE2 was announced at Jackson Hole, Wyo., last August, fueling the latest collapse of the dollar. Silver has nearly tripled since then.
4. The Fed has also “enabled” the big spenders in Congress. Since Nov. 3, 2010, the Fed has purchased $550.6 billion in U.S Treasuries, financing about 70% of new deficit spending. No wonder the federal deficit is actually increasing during a recovery, another unprecedented fiscal development.
There is a bright side to this dismal series of Fed policies: The stock market has risen sharply, in a mirror image to the dollar’s fall. In general, stocks have risen at about twice the rate that the dollar has fallen.
Why the Stock Market is Responding Positively to a Weaker U.S. Dollar
Since the dollar’s peak in early 2009, the Nasdaq and the S&P 500 have both doubled. More recently, since QE2 was announced, the S&P 500 has risen 30%, from 1,047 to 1,360. Ed Yardeni reports that 127 of 129 industries have risen since then. There is a clear correlation between easy Fed policies and a rising stock market. This correlation may not last forever, but the first quarter shows a continuation of this trend.