7 March 2023 - Thoughts on the Market

A month ago, I told my readers that we were embarking on a period of significant U.S. dollar strength. Since then, the dollar has strengthened against all major currencies, with the dollar posting its largest gains against the Australian dollar (the “Aussie”). The Aussie has depreciated by over 5% against the dollar, but there is still more weakness to come. I am not sure whether this phase of dollar strength will simply be a technical correction of the dollar’s major sell-off since September, or whether it will turn into something even bigger.

In my write-up in early February, I had noted that interest rates were poised to rise much higher than most people expected, but I expected the move to take longer than one month. In the past month, the yield on U.S. 2-year paper has shot up by over 14%, and this move seems to still have the power to carry on further. In response to the sharp rise in interest rates, many foreign investors have bought dollars so that they could enjoy the higher yields now available in U.S. treasuries, and they are likely to continue shifting capital into the U.S. as long as yields hold their current levels or go even higher.