(Kitco News) - As an energy crisis plagues Europe and Japan engages in relatively loose monetary policy, the U.S. dollar will continue to grain ground compared to other currencies, said Jim Bianco, President of Bianco Research LLC.
"If [Japan] is 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 getting really hurt by this gigantic energy problem that they have, and the amount of money that they're going to have to spend in order to alleviate people's energy bills this winter."
Bianco said that 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 figure out where to go next," due to a "flight to safety."
The U.S. Dollar Index (DXY), which tracks the dollar's strength relative to a basket of other currencies, has risen 14.3 percent over the year. Bianco said that the dollar would continue its upward trend.
"Currencies trend more than anything else," he said. "And they just keep going. A case in point is the yen. When it rose from 100 to 110, people said that's too much. And today it is 145, or at least it was earlier today."
Bianco spoke with David Lin, Anchor and Producer at Kitco News.
Europe's energy crisis
Russia, which supplies 40 percent of the European Union's natural gas, recently shut off its Nord Stream 1 gas pipeline to Germany. This comes amid European sanctions on Russia for its invasion of Ukraine.
Gas prices surged more than 35 percent, after Russia announced that it would shut off its pipeline indefinitely. Dutch TTF Gas Futures are up 195 percent year-to-date, prompting European leaders to consider price caps on energy.
Russian President Vladimir Putin warned on Wednesday that Russia could cut off energy exports to Europe entirely, if the E.U. implements price caps.
"Europe has filled their [gas] storage facilities to about 82 percent of their maximum as of a day or two ago, which is about where you would expect them to be in early September," said Bianco. "In prior years it would cost 13 to 15 billion euros to do [that]. It's at €130 billion euros and counting right now."
He added that while Europe has the gas required to last the winter, it would need to "drain [its] bank account to pay" for it.
"Let's not forget manufacturing," said Bianco. "The single most important input to manufacturing is cheap energy. It's not labor. And that cheap energy is gone. So Europe has already incurred that cost… and that is going to be a very big problem for their economy."
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Monetary policy
After Federal Reserve Chairman Jerome Powell's hawkish speech at Jackson Hole, investors are eyeing the Fed's next rate decision on September 21st.
The CME's Fed Watch Tool, which is based on Fed Funds futures data, suggests an 88 percent change of another 75 bps rate hike.
"Whatever the Fed Watch Tool says is what I think is going to happen," said Bianco. "Adding to 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 stay uber aggressive in raising rates and dealing with the inflation problem."
However, Bianco added that the United States could be heading towards a new inflation regime, in which 3-5 percent inflation is the norm.
"I think more and more people are starting to think [inflation won't settle at] 2 percent," he explained. "Maybe three, maybe four, maybe five, but basically not 2 percent. If that's the case, the Fed has got a lot more rate hiking to do."
To find out Bianco's views on Bitcoin and Ethereum, watch the video above.
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