The dollar is back!
In the world of macroeconomics, the rise of the US dollar is as game changing as a penalty in the last minute of a closely tied football match. In just one year, the US dollar has leapt up in value over 19% against the Euro. It’s back and stronger than ever, at high levels that we haven’t seen in over a decade. So central is the dollar to the world’s geo-politics, that its movements are having a knock-on effect on a range of businesses, foreign economies and other assets. What’s causing the climb? In simple terms, the strengthening dollar is a reflection of the growing American economy. It is rising in comparison to other major currencies just as the US economy fares relatively better than the rest of the world. The reverberating effects of this trend are wide reaching. It has damped investor appetite for gold, traditionally viewed as a stable alternative in times of currency lows and market volatility. And the precious metal could fall even lower in the coming months. The strong dollar has also contributed to the decline in value of the world’s most traded commodity: oil is currently in abundance due to high production levels, and given that its price is denominated in dollars, the pressure on its value is making it even cheaper for buyers.
Among American businesses, the strong dollar is a mixed blessing. It makes the goods of US manufacturers more expensive and therefore harder to sell. Yet for the increasing number of firms that are opening branches abroad and outsourcing work, the expensive dollar makes foreign labour more financially appealing and accessible. It’s a benefit for businesses, albeit not for local employment.
For American consumers, i mported goods are now cheaper. That’s an advantage for them and for the foreign businesses and countries that are able to export their goods more economically. And as foreign money comes into the US due to the favourable exchange rates, the value of American stocks and bonds is increasing.
Traders should keep in mind the brilliance of economics before presuming that the current trend will continue indefinitely: the pressure that the dollar is exerting on local American manufacturers, and the smaller companies that have less oversees infrastructure and sales, is estimated to cut a third of a point off US economic growth this year. That in turn will help to keep the dollar in check. Think of it as a self-acting balancing mechanism that protects society’s various economic factions.
Conscious of this, the Federal Reserve is torn about whether to keep interest rates low or raise them in response to the robust dollar. It is, of course, their responsibility to support national interests. However, now more than ever, they must remember that they have a global influence. Their every move will be tightly scrutinised by commodity traders, global businesses and exporters, and the other central banks.