Treasury Yields, Oil Production and Cryptocurrencies: Global Economic Indicators
As concerns over the decline of the dollar—and of the overall state of U.S. and international relations—remain at the forefront, Don Lloyd, Senior Vice President and Manager of Capital Markets – Foreign Exchange, Rate Swaps and Commodity Derivatives at Associated Bank, points to signs that not only is the dollar still healthy but so, too, is our place on the global stage.
Movement of the Dollar
“What moves the dollar mostly are investment and interest rate differentials between countries … (and) right now, what you have going on is a little bit of a bubble, where you’ve got oil prices that have pushed up to $60, $70 a barrel,” Lloyd said. “When you have commodity prices that are based in U.S. dollars—like oil and gold—when they go up, you’ve got the dollar that’s coming down.”
A slight decline in the strength of the dollar as a global currency is in line with “the natural course of things,” according to Lloyd. This means “the dollar’s coming off (a high) a little bit,” Lloyd said. “And that’s fine. Things don’t move in one direction forever. … I still think you’re in a long-term dollar bull scenario.”
Lloyd cautions that a slightly weakened dollar could stick around anywhere from a few months to as long as a year but is optimistic about the long term.
“Take a look at the longer type (of) view,” Lloyd said. “The euro has moved from a $1.60, to $1.40, down to $1.10. We’re correcting up to $1.25 or so right now … I still think the U.S. is leading the world. I still think U.S. interest rates are going to go up, I think the U.S. interest rate curve is going to steepen, and I think all of that is going to attract funds back into the U.S.”
A rising yield on the 10-year Treasury note, which guides the direction of other interest rates, has been hovering around the 3 percent mark, the highest since January 2014. The 10-year note serves as a leading economic benchmark.
Some perceive a higher yield as a sign of a healthy economy; however, it can also cause those who are more risk-averse to take pause.
“This is the highest yield we’ve seen in quite a while, and you’ve got the yield curve starting to steepen now, which is good, it’s healthy, it’s what the U.S. wants,” Lloyd said. “It’s basically an indication that the economy is good, there’s a little bit of inflation being brought back in, real rates of return are starting to get where they need to be. That’s all good news for the U.S. That’s only going to attract investments, (and) it’s going to attract capital.”
American oil production is the highest it’s ever been, and prices continue to remain fairly stable.
“(OPEC) said they said they were going to cut production, but they really didn’t,” Lloyd said.
“And we’re pulling (even more) oil out of the ground now—I mean, we’ve just surpassed Saudi Arabia in oil production at 10 million barrels a day, and we’re closing in on Russia, which is producing about 12 million barrels a day.”
Though some worry $70 a barrel might be a bit steep, Lloyd notes it hasn’t so far translated to large increases at gas pumps. Because of the current state of oil production, Lloyd said he doesn’t foresee big increases for consumers.
“It hasn’t really bled through to the pump yet, and really you haven’t seen it in the pricing of goods yet that are oil-based,” Lloyd said. “There’s still a lot of production out (there). When you take a look at the oil rigs that have been opened up … we’re back up to like 750 rigs (that) have been opened up—400 alone in the past year.”
“Right now, the demand, and the world demand, that you see … is surpassing or certainly keeping up with the production,” Lloyd said. “It’s a nice balance. It’s a nice equilibrium right now. We’ve seen a little bit of prices go up at the pump, but we’re not talking $3.50, $4 a gallon like we’ve seen before. There’s just too much supply that’s still out there.”
Cryptocurrencies Continue to Cause Intrigue
Cryptocurrencies, including the most well-known variety, bitcoin, continue to attract analysis from financial insiders.
“It’s on everybody’s radar screen,” Lloyd said.
“And you’ve got regulators and you’ve got country politicians now that are sitting there for whatever concern they have, whether it is the unregulated market of cryptocurrencies or whether it is the avenue of money laundering and all these bad things that are out there,” Lloyd said. “But at the end of the day, the professionals in this market in the financial market, which are very good at making a dollar, they’re taking a real good look at this. And the Wild West is sort of ending when it comes to cryptocurrencies.”
“Personally, I think a year from now, two years from now maybe, you’re going to look back at cryptocurrencies and say ‘oh yeah, remember that.’ It’s a fad that I think has just sort of blown up and now it’s going to go away the way of the pet rock or the Cabbage Patch Doll.”