What’s the Story with the US Dollar?
Oct 12, 2009
Posted by Jody Eisenman | Filed under Uncategorized
Over the last six months, the US dollar has fallen about 11%, and is now trading around its’ lowest level in 14 months against our six major trading partners. There have been various theories for this, ranging from the high levels of US indebtedness, disappointment with Obama, high unemployment rates, and a host of others. While explaining currency movements is an extremely inexact science (mostly due to the fact that there are so many factors involved, including heavy bets by currency traders), I do not believe that any of the reasons above are major factors.
I believe that the reason the dollar is falling is this. As long as the world economic outlook is poor, investors seek the safest currencies. For 2008, this was undoubtedly the dollar. Investors were even willing accept extremely low yields on treasuries just to be in what was perceived as a safe currency. This caused the US dollar index to rise from a low of 72 to a peak of 89. As in became apparent that a recovery was in progress, investors moved were unwilling to accept such low yields compared to other instruments, and began “normal” investing again. As such, the dollar index has now fallen back to around 76. If the US wishes to protect the dollar, the Fed will probably be forced to start raising rates, albeit slowly. I do not perceive this as a major issue going forward. See the chart below:
http://www.fxstreet.com/rates-charts/usdollar-index/
In the meantime, the stock market keeps rolling along with another strong weak. The market has exceeded even the most bullish sentiments on Wall Street. I believe this will continue over the near term.
