I don’t understand how Schiffer is implying that rising interest rates will cause the dollar to fall. Currency traders are most sensitive to interest rates. The dollar fell 40% vs Euro in 3 years before the Fed started raising rates and since then it has stayed its ground vs Euro in almost 2 years. The budget deficit in the mean time has grown and grown but hasn’t been able to hurt dollar while rates have been rising. Also, if the dollar falls, then after a transitory period, US exports will grow reducing the trade deficit. This will help dollar as well as economy. Moreover, falling dollar will boost real assets like housing keeping the prices up though value may go down. There are just too many confusions for me in this post.
Also, traders and hedge fund managers have been betting on a dollar decline for nearly 4 years now. Consider that as there is huge amount of money shorting dollar. Any short squeeze can result in unexpectedly boosting the dollar. Same happened to Yen in 1996-1998 when everyone was short on Yen.
US economy, dollar, housing, bond and stock markets are all very delicately poised. Things are definitel going to get ugly but by how much, is difficult to say. Whether we hit stagnant economy and rampant inflation is potential possibility but not a sure bet.
