Looking for domestic bliss at the expense of the dollar

The cut in Interest rates by the Fed has lowered the Fed funds rate to 4.75. The two-year Treasury is at 3.99. The comparable short rate for Europe is 4.00 percent and the two year rate is 4.05 percent. There is little reason to hold dollar denominated assets from the bond side. Year to date equity performance has favored the US but when looked at on a risk adjusted basis the advantage is less. This gain for the US is all based on the reaction from the rate cut and not on improved earnings. On a forward basis, there is little advantage for holding US equities. The trend for the dollar is also not good. Simple momentum models all point to a negative trend.

The value of gold has trended higher on the latest down move on the dollar. Gold still serves as a store of value during periods of higher inflation or declining dollar. While the inflation story has been weaker because the range of inflation has been relatively tight for the last decade, the demand for gold as a substitute for dollar reserves has been a growing theme There is special interest by many of the traditional dollar reserve central banks of the Middle East and China. The reserve data from the IMF does not fully support this story at this time but it has gained more discussion in many financial circles.

Monetary policy is being eased even though it is well known that the dollar decline will be exacerbated. The dollar has not seen a significant volatile sell-off, so the thinking is that that the decline can be managed while trying to support domestic growth. The higher export numbers on the back of the declining dollar also support domestic growth. It is worth the chance of debasing the dollar if your objective is domestic growth. Unfortunately, there will ultimately be a financial cost with higher domestic rates. However, the financial community may prefer to take the risk of a declining dollar than be hurt with a credit woes.