My editor asked me to write a piece headlined “Is the US dollar really taking a new turn?”. The question to address is whether the sharp fall of the greenback a year ago came to an end at the beginning of 2021. To answer this question, we must first ask why the US dollar fell last year. Was it because of interest rate cuts or quantitative easing? No. Exchange rates of currencies are always relative. Therefore, the question to ask is whether the interest rate of the US dollar has been reduced more than those of other currencies. That was the case early last year - the rate of the US dollar fell from a starting point of 1.5+ percent, which was much lower than other currencies. But now that the interest rates of all currencies have fallen to zero, it has become much harder to explain why the greenback fell in the second half of 2020.

Was it because the US has printed more money than other countries? The US Dollar Index is mainly measured against the euro. Since March 2020, America’s M2 has been growing at a rate faster than that of the eurozone. From last June to today, the growth rate of the US has been 13 to 14 percent faster than that of the eurozone, and the discrepancy has stabilized over the past more than six months. But this leads to another question: in January 2021, the growth rate of M2 in the US was 14.4 percent higher compared with the eurozone, and the rate outpaced that recorded in the latter half of 2020. How come the exchange rate of the US dollar went up again at the beginning of 2021? It is hard to explain why. Some other factors should have been at play.

The exchange rate of the US dollar took a turn on January 6 and went up from 0.89. That was when the pandemic was at its worst. Since then, the numbers of daily infections have been going down in the US, the UK and other parts of the world. Conventional wisdom holds that when there is good news, it is time to sell. Talks on vaccines, the end of the pandemic and economic recovery have been going on for months. January 6 was the third working day after the New Year. It was the time when investors started to make plans on their funds. Then in late January, several Big Tech shares, including Tesla, had peaked and started to fall. But it took Nasdaq three more weeks before it peaked and went down.

What happened was that when US stocks, in particular technology stocks, went up, the greenback fell; when they fell, the US currency rose. In other words, the movement of the US dollar depends on the level of risk. This is another more relevant factor than the relative growth rate of M2. So when one asks whether the US dollar is taking a turn, it is tantamount to asking whether US stocks, especially technology stocks, have stopped going up and, to be more precise, whether the latest fall of technology stocks is merely a short-term adjustment or indicative of a switch from a bull market to a bear one. But how is a bear market defined? In view of the big fluctuations of technology stocks, a 20 percent adjustment can easily happen whether in the US or Hong Kong. But there could be more waves of growth. After all, for the past quarter of the century, we have been living in a technology-driven age. In each bull market in the past years, technology stocks outperformed stocks from all other traditional sectors.

So now I have an answer to my editor: although there is currently a significant adjustment to technology stocks and the US dollar is rebounding notably, those stocks will increase more significantly every time they rise while the greenback will drop more sharply every time it falls.

(Law Ka-chung, mewe.com/join/lawkachung, facebook.com/kachung.law.988, [email protected])

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