Posts

dollar

Surging US Dollar Wreaks Havoc on Global Economy

The U.S. dollar is the strongest it has been in the last 20 years. The rising value of a dollar has worldwide ramifications, with international currencies plummeting in comparative value and foreign central banks hiking up interest rates to protect price stability.

The dollar continues to strengthen as the U.S. Federal Reserve continues its aggressive monetary policy, raising interest rates to bring down inflation in the U.S. economy. The Dollar Index, which measures the U.S. dollar against an average of six major global currencies, including the euro, Swiss franc, Japanese yen, Canadian dollar, British pound and Swedish krona, has risen 15% in 2022.

A stronger dollar can purchase more foreign currency. The British pound plummeted to a record low on Sept. 26, reaching $1.03 against the dollar in a near historic dollar-to-pound parity. Historically, the pound has always been valued higher than a dollar, usually upward of $1.20 against the dollar.

Embed from Getty Images

The effects of a strengthening dollar reverberate throughout the global financial system since the dollar is the currency used in most international transactions. Recent shocks to the global economy, such as the war in Ukraine, supply chain disruptions and the pandemic, push up the dollar’s value even higher since companies and other countries stow their reserves in dollars during economic volatility.

The dollar is traditionally seen as a symbol of “stability and security” in terms of crisis. Moreover, despite ongoing inflation, the U.S. economy is still more stable than other nations’ economies. Consumer spending is still strong, and unemployment is still low.

George Saravelos, Deutsche Bank’s head of foreign exchange research, noted the building tension in the global economy.

“The dollar is experiencing its largest valuation overshoot since the 1980s. Amid extreme volatility, a global chorus of discomfort is slowly building.”

American tourists and U.S. consumers benefit from a stronger dollar since goods and services produced in other countries and sold in the U.S. become less expensive to purchase. A stronger dollar also helps U.S. companies import goods at lower prices. Tourists traveling abroad can also buy goods at lower prices since the dollar has stronger buying power.

Embed from Getty Images

However, American businesses that export goods struggle under a strengthening dollar since goods made in the U.S. become more costly and less attractive to buyers in other countries. Multinational businesses that operate in other countries also make less profit when they convert revenue in foreign currency to U.S. dollars.

Smaller emerging economies worldwide especially struggle with the rising cost of the dollar since international companies borrow and trade money in dollars. The world’s commodities, like oil, industrial metals, wheat and soybeans, are priced in dollars and increasingly more expensive to import. Petrol now costs more in several countries worldwide. Countries with debt denominated in dollars will also see higher interest payments, no matter the initial exchange rate.

As reported by the NYTimes, Mr.Obstfeld, a U.C. Berkeley economist, spoke on the far-reaching impact of the Fed’s monetary policy.

“Central banks have purely domestic mandates, but financial and trade globalization have made economies more interdependent than they have ever been and so closer cooperation is needed. I don’t think central banks can have the luxury of not thinking about what’s happening abroad.”

At the same time, the consequences may be even worse for the global economy if the Fed does not bring down historical inflation rates in the U.S.

Central banks around the world are trying to raise the value of their currencies by increasing interest rates, similar to what the Fed is doing in the U.S. The U.K. increased its rate by 2%, and analysts predict they may raise it to as high as 6%. The European central bank has increased its interest rate by 1.25 percentage points. These rising rates may push many countries into a recession if raised too high by decreasing borrowing and spending and reducing economic activity.

house

Homebuilder Sentiment Falls for Ninth Consecutive Month

U.S. homebuilder confidence in the housing market dropped to its lowest level since the beginning of the COVID-19 pandemic. Experts believe the high inflation rate and rising borrowing costs are contributing to first-time homebuyers’ hesitancy to purchase new single-family homes.

The National Association of Home Builders/ Wells Fargo Housing Market Index, which measures the activity of the single-family housing market, fell to 46 in September after declining for the ninth consecutive month. The last nine months are the most prolonged and persistent decline in builder sentiment in the last four decades.

Embed from Getty Images

Experts say a Housing Market Index above 50 shows a healthy market with net positive growth. In November 2020, the index rose to 76, the highest in 35 years, due to the Federal Reserve pushing the federal funds rate to nearly zero. After the pandemic’s dampening effect, the Fed’s loosening of the federal funds rate was meant to stimulate the economy back to health.

Recently The Federal Reserve has been raising interest rates by adopting an aggressive monetary policy to bring the inflation rate back down to sustainable levels. A lack of supply due to construction costs fueled by those interest rates has slowed down building into a housing recession.

NAHB chairman Jerry Konter said builders are responding to a falling market by using incentives to bolster sales, “including mortgage rate buydowns, free amenities and price reductions.”

Pantheon Macroeconomics analyst Ian Shepherdson believes that builder sentiment will continue to decline.

 “This probably will not mark the bottom of the cycle, given the latest surge in mortgage rates above 6%. The rate of fall of mortgage applications slowed over the summer, but the early September numbers point to a renewed sharp decline.”

Mortgage rates have skyrocketed to those seen during the 2008 housing crisis, with interest rates on 30-year fixed loans hitting 6%. According to data released from the Mortgage Bankers Association, mortgage rates have already risen 4% so far this year.

Embed from Getty Images

This increase in mortgage rates would add $389,000 in interest payments to the life of a $500,000 single-family home purchase. The association’s data also showed that the seasonally adjusted MBA Purchase Index rose only 0.2%. New applications for mortgages went down  1.2%.

Though builder sentiment often signals the eventual direction of mortgage applications, NAHB CEO Jerry Howard told Fox Business that people should have confidence that the housing market will pick back up again.

I think you’re seeing a weakening in virtually every market, but those that were stronger are weakening less. I guess the most important thing that investors and people need to remember is that Americans still want to own their homes and that, as soon as the conditions turn a little more favorable, housing will pick up. That will pick up the whole economy.”

dow

Dow Tumbles More Than 1200 Points After Inflation Data

US stocks plummeted Tuesday after the latest Consumer Price Index report showed inflation rates are still at a 40-year high. The Dow fell more than 1200 points on its worst day since June 2020.

The report revealed that monthly consumer prices rose more than expected in August. History shows that low unemployment and rising inflation often precede a recession. High inflation rates erode consumer purchasing power. They also decrease companies’ profits due to rising material costs, causing stocks to fall and economic activity to slow down.

Embed from Getty Images

Matt Peron, director of research at Janus Henderson Investors, agreed with most analysts that the Federal Reserve will likely increase the federal funds rate higher to cool off the market.

 “The CPI report was an unequivocal negative for equity markets. The hotter than expected report means we will get continued pressure from Fed policy via rate hikes.”

The Fed responds to rising inflation by increasing the federal funds rate. In the wake of the pandemic, the rate sat at near zero in an attempt to stimulate the economy. The Fed then hiked rates from a range of 0.25% to 0.50% in March 2022 to a range of 2.25% to 2.5% in July 2022. The rate of increase in borrowing costs was the fastest since the 1980s.

When the Fed raises the federal funds rate, the cost of credit throughout the economy increases and loans become more expensive for businesses and consumers, since interest payments are higher. At the same time, people with savings in banks earn more interest on their deposits. Together, this drops the amount of money in circulation, bringing down the inflation rate. However, if the Fed increases the federal funds rate too high, it may also trigger a recession by slowing economic activity too much.

Embed from Getty Images

The Fed is expected to keep hiking the federal funds rate until a sustained drop in consumer price inflation. Investors hoped that the Fed would keep its interest rate increases at a slower speed, with analysts predicting a federal funds rate of 3.4% at the end of the year. Brian Jacobsen, a senior investment strategist at Allspring Global Investments, told Reuters his concerns.

“The big risk is that next week, the Fed tries to convince the markets that they’re not going to just try to go for 4% with the Fed funds rate, but that they could push it to something closer to four and a half percent.”

All three major US stock indexes — S&P 500, the Dow, and Nasdaq had their most significant one-day percentage drops in over two years. The CBOE volatility index, which measures the market’s expectations for volatility over the next 30 days, rose to 25.74 points.

The next Federal Reserve meeting is scheduled for Sept. 20.

 

PPP Loan

Why Some Businesses Are Hesitant To Apply For PPP Loan Forgiveness 

This week, the Small Business Administration opened up their forgiveness portal for the Paycheck Protection Program (PPP) loans. The CARES Act initially made these loans available for small businesses who were struggling to stay afloat during the pandemic. The Act went into effect in the beginning of April, and since has dealt out more than 5 million approved loans which equated to $525 billion. 

To qualify, small businesses had to show that at least 60% of the loan would be going towards payroll costs for employees. The repayment terms of these loans are also relatively casual in terms of federal loans, as most firms will only pay an interest rate of 1% and have at least a six-month grace period before needing to start payments. Loans that were given before June 5th must be repaid in two years while those dealt out after have five years. 

Embed from Getty Images

Even with all of these seemingly attractive qualities, accountants nationwide are noting that many small businesses are choosing to sit out this round of PPP loans after the initial round of loans began going more towards large corporations and wealthier employers who didn’t really need the financial support as badly. 

Additionally, many small businesses are still asking Congress the same question in regards to these loans with no real answer: will expenses covered by these PPP loans be deductible on future tax returns? Ann Kummer is a Certified Public Accountant in New York who claims to be giving a lot of her clients the advice to wait before applying for a federal loan. 

“My advice to all of these clients is that you don’t want to be the first to rush into the forgiveness process. Things will probably continue to change, do you really want to be the guinea pig?”

Embed from Getty Images

Many small businesses feel the same way, especially considering so much change has already occurred in terms of the pandemic and its impact on the economy. There’s still no word from Washington D.C. on what the next Covid-19 relief bill will look like either, something many Americans have yet again been waiting for. 

According to the IRS, forgiveness of the loan will be tax-free, but business owners who take out a PPP loan will not be able to write off expenses that in any other context would be deemed deductible if they use the PPP funds to cover that cost. However, many Congress members disagree with the IRS’ claims and want small businesses to be able to deduct those costs, making this one of the many points of contention that’s delaying the release of another relief bill. 

Overall, many business experts and accountants nation-wide are urging their clients to hold off and wait in terms of applying for one of these PPP forgiveness loans. While many businesses are suffering now, depending on how much this loan program changes the damage could become a lot worse for them down the line. 

Experts recommend that all businesses maintain a separate business account for all of their loan proceeds so they’re able to see exactly what they’re receiving and when they are spending it. Additionally all businesses should maintain any and all documents that show how their funding has been spent throughout the duration of the pandemic. This way, no matter how much the pandemic and the forgiveness program changes in the coming months, businesses will have a formal record of spending and receiving.