US Dollar Rising and Outlook


Despite global economic woes, one positive aspect for main street America has been the relatively rapid rise of the US dollar of late. The dollar index (DXY), a measure of the greenback against a trade-weighted basket of six major currencies, has strengthened by over 20% in this time. However, the question is will this trend continue? To answer this, one must look at the current factors driving the US dollar.

Why the dollar is rising

A number of analysts had predicted the continued demise of the US dollar thanks to the financial-sector bailout and weakening economy but its sharp upside has surprised many. The dollar’s recent climb is part of a massive reversal of long-standing investing trends (due to the global economic slowdown) such as buying emerging-market stocks or wagering on rising commodity prices. When investors retreat from such investments, they are often selling them in exchange for US dollars. The U.S. currency remains the most popular among global institutions, accounting for 55% of the assets and liabilities they hold in foreign currencies, according to the Bank for International Settlements. It has been further boosted because banks around the world are scrambling for dollars after inter-bank borrowing between banks all but ceased to function during the past month thanks to the liquidity crunch

After sending money overseas for years, U.S. investors now are bringing it home in a flight to safety. In July and August, the latest months for which Treasury Department data are available, U.S. investors sold $57 billion more in foreign stocks and bonds than they bought — the largest-ever such repatriation. Dollar demand has also been reflected in the rise in purchases (and hence the price) of U.S. Treasury bonds, seen as the safest haven of all. The most recent data shows that such holdings of Treasury’s increased by about $100 billion over the past four weeks. Other countries are also feeling the effects (even more than the US) and so are slashing interest rates to try and boost domestic economic activity, so the expected yield differential with the US is falling. With this trend set to continue, investors will continue to flock to the dollar.

The US economy is likely to recover faster than other economies because unlike other central banks, the Fed more than a year ago began lowering interest rates, which punished the dollar. Now it could be a positive, as other central banks catch up. In the U.S., “a lot of the heavy lifting has already been put in the pipeline,” says Stephen Jen, global head of currency strategy at Morgan Stanley, in the WSJ. “The same cannot be said of Europe.” The same old reasoning still applies: The U.S. is regarded as being able to weather a recession much better than the euro zone

As the dollar rises, US consumers are seeing some clear benefits which overall should boost spending and assist with getting the nation out the current economic slump. Benefits of the high US dollar to every day consumers include, lower oil and commodity prices, lower inflation (prices) and cheaper travel. It does hurt foreign corporate profits and exporters, but given our economy is 70% consumer driven, I think what helps consumers is much more important right now.

Given the rapid rise in the dollar in synchronization with the escalation of the global financial meltdown and tightening credit markets, it stands to reason that as credit and stock markets stabilize so too will the dollar. This means it will give back some of its gains, but should be able to maintain current levels well into next year. If the government implements much needed long term regulatory reform and adopts a more fiscally conservative policy once the economy has recovered, then there is a chance that the US dollar could maintain its strength for a number of years to come.

What about the Euro?

The US dollar continues to strengthen relative to the 17-member Euro currency, which has been on a downward trend as concerns over European sovereign debt crisis and Greece’s uncertain membership of the Eurozone grows. The Euro fell to as low as $1.24, the weakest since its multi-year low in July 2010 of $1.18 following the first bail-out of Greece.

Other major currencies have also seen significant shifts against the Euro which has declined 2.1% this year against nine developed market counterparts. Along with the greenback, the Yen has risen to 6 month highs against the Euro. This has spurred speculation that the Bank of Japan could look at weakening the Yen again. The Yen has stayed relatively constant against the dollar over the last month, suggesting that most currency moves are driven by Euro weakness.

Most analysts are predicting further falls in the Euro as the credibility of and confidence in policy makers wanes. Some are even suggesting that the Euro could reach parity with the US dollar by the end of summer. However this downward spiral could quickly reverse if there is more certainty and clarity around Greece’s exit. Further, new proposals to move towards a European-wide deposit guarantee system and common bond issuance could provide more relief.

Leave a Reply

11 Comments on "US Dollar Rising and Outlook"

Notify of

[…] Unfortunately, the lower US dollar will also drive inflation domestically and act as a support for higher oil prices. Neither of which is good for the economy. With the US dollar not showing much strength into the future it is important for your investment portfolio to be internationally diversified and to invest in American companies that derive significant overseas earnings. See an updated article on the US dollar trend reversal and sharp uptick: US Dollar Rising and Outlook […]

Sunday 4:59 pm

This would make a great source. “Andys21” though… not the most appropriate reference name.

[…] crash anytime soon, in fact it will probably go up as it is seen as a safe haven currency (see my post on this trend). Not being a big gold investor myself, I am always cautious about investing in […]

[…] presents US Dollar Rising and Outlook posted at Saving to […]

[…] rates too low for too long and thereby helping to inflate a bubble in the housing market. The appreciation of the dollar over the last few months was primarily due to a perceived flight to safety in US treasuries, which […]

[…] Dow was down by over 30% in comparison). If it wasn’t for the unexpected appreciation in the US dollar, as global investors flocked to the safety of US treasuries, gold could have performed even more […]

[…] of the US’ safe haven status and the dollar’s global benchmark status (since the gold standard was abolished), the world keeps on investing in […]

[…] demand guidebooksCommunityDon’t forget to vote at for the Amateur Traveler! Why the dollar is rising chris2x on twitter for timely updates No Colorado Podcast yet, I will let you knowPosted from . How […]

Thursday 9:53 am

>The dollar is rising and it could still rise till the time Germany and other stronger economies in Europe hesitate over whether to bail out the eurozone's weakest links. But if Europe takes the decision on a plan to either force out those nations from the European Union or unequivocally bail them out, the euro could reclaim its lost value and hence top the dollar from rising. At that time, the U.S. could go back to the decade-old approach of using a fragile dollar to prop up big U.S. companies and hedge funds.

mortgage finance
Wednesday 5:06 am

>The rising dollar is not indicative of debt which is the really serious problem for the US.

A. Mendoza
Monday 6:35 pm

Yes it is because investors sell dollars (and price falls relatively to other currencies) when they think their portfolios are becoming risky due to the national debt.


Previous post:

Next post:

Disclaimer: The information contained on Saving to Invest (this site) is for general information purposes only and does not constitute factual or professional financial advice. In accordance with FTC guidelines, we disclose that we may have a financial relationship with some of the merchants/companies mentioned on this website. We do our best to maintain current information, but due to the rapidly changing environment, some information may have changed since it was published. Please do the appropriate research before participating in any third party offers. Refer to the Privacy Policy and Terms of Use for more information