Expect a stronger US dollar as Europe’s energy crisis deepens – Jim Bianco

(Kitco News) – As an energy crisis afflicts Europe and Japan embarks on relatively loose monetary policy, the US dollar will continue to slump against other currencies, said Jim Bianco, president of Bianco Research LLC.

“Whether [Japan] not going to raise rates to be more in line with the rest of the world, it weakens their currency,” he explained. “The second story is Europe. The euro and the pound are really affected by this gigantic energy problem that they have, and the amount of money that they are going to have to spend to alleviate people’s energy bills this winter.

Bianco said the dollar is a “safe asset” and that given heightened geopolitical instability and market uncertainty, international investors “would put [their] money in the dollar and then figuring out where to go next”, due to a “flight to safety”.

The US dollar index (DXY), which tracks the strength of the dollar against a basket of other currencies, rose 14.3% on the year. Bianco said the dollar will continue its upward trend.

“The currency trend more than anything else,” he said. “And they just keep going. An example is the yen. When it went from 100 to 110, people said it was too much. And today it’s 145, or at least it was earlier today today.”

Bianco spoke with David Lin, presenter and producer at Kitco News.

The energy crisis in Europe

Russia, which supplies 40% of the European Union’s natural gas, recently shut down its Nord Stream 1 gas pipeline to Germany. It comes amid European sanctions against Russia for its invasion of Ukraine.

Gas prices jumped more than 35% after Russia announced it would close its pipeline indefinitely. Dutch TTF gas futures are up 195% year-to-date, prompting European leaders to consider capping energy prices.

Russian President Vladimir Putin warned on Wednesday that Russia could completely cut off energy exports to Europe if the EU enforces price caps.

“Europe has fulfilled its [gas] storage facilities at about 82% of their maximum a day or two ago, which is about what you would expect in early September,” Bianco said. “In previous years, it would cost 13 to 15 billion euros to make [that]. It stands at 130 billion euros and counts at the moment.”

He added that even if Europe has the gas it needs to get through the winter, it should “drain [its] bank account to pay it.

“Let’s not forget the manufacturing,” Bianco said. “The most important input to manufacturing is cheap energy. It’s not labour. And that cheap energy is gone. So Europe has already borne that cost. .and that’s going to be a very big problem for his economy.”

Monetary Policy

After Federal Reserve Chairman Jerome Powell’s hawkish speech in Jackson Hole, investors are eyeing the Fed’s next rate decision on Sept. 21.

The CME’s Fed watch tool, which is based on Fed Funds futures data, suggests an 88% change from another 75 basis point rate hike.

“Whatever the Fed’s monitoring tool says, I think is going to happen,” Bianco said. “On top of that, the Bank of Japan moved 50 basis points today. The ECB is expected to move 75 basis points. The table is set now that the Fed is going to remain very aggressive in raising rates and managing of the inflation problem.

However, Bianco added that the United States could be heading towards a new inflation regime, in which 3-5% inflation is the norm.

“I think more and more people are starting to think [inflation won’t settle at] 2%,” he explained. “Maybe three, maybe four, maybe five, but basically not 2%. If so, the Fed still has a lot of rate hikes to do.”

For Bianco’s take on Bitcoin and Ethereum, watch the video above.

Follow David Lin on Twitter: @davidlin_TV

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Mary I. Bruner