The dollar is back!

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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