The United States Dollar Index, which was developed to measure the value of the almighty dollar against currencies from numerous foreign countries has reached its highest level in more than four years. According to Societe Generale analysts, the momentum of the dollar’s advance is without doubt extraordinary.
The US dollar has been the top business currency in the world for a long time and often considered among investors as being a “safe bet”. However, experts believe this incredible boost has to do in part with traders who believe the economy in America is improving, in particular how it relates to other parts of the world. Therefore, the Federal Reserve will probably push to increase interest rates, which is usually good for US currency.
In comparison, things in Europe are not fairing as well. To help bolster that country’s economy, the European Central Bank is coming up with some stimulating measures based on a weaker Euro. Also struggling because of persistent economic problems is the Japanese Yen.
Economists from Capital Economics feel the upward dollar trend will continue and in fact, they anticipate appreciation of the US dollar even more as the Fed’s monetary policy diverges from central banks in other areas of the world. The prediction is that by the end of 2016, one Euro will equal $1.15, compared to the $1.27 it is now. Against the Euro, the US dollar has gained over 8% just in the past six months.
For the average American, a stronger US dollar could mean a couple of different things. For one, this is a sign of confidence in the country’s economy but also that foreign investors understand that America is conceivably an excellent place to park money for the future.
A stronger US dollar also makes it less expensive for companies to import goods. In addition, this could help keep inflation in check while allowing the federal government to lower interest rates for as long as deemed necessary in an effort to stimulate the economy.
A favorable exchange rate would also give people more “bang for the buck”, making it easier to travel abroad and spend money. However, while there are a lot of positive aspects to a stronger US Dollar Index, there are some downsides to consider.
With a strong dollar, imports are cheapened but in turn, it makes it look to the rest of the world as if American products and exports are more expensive. Domestic manufacturing could be hurt due to US firms competing for consumers who have international rivals that offer products at discounted prices.
Additionally, multinationals in the US that sell a significant amount of goods to overseas buyers could ultimately get cheated when exchanging earned revenues abroad back into US dollars. There are both pros and cons to a stronger US dollar but as to the extent of how consumers and businesses will be impacted, this remains a mystery.
Investor outlook can change fast and central bank actions or data that changes investors’ viewpoint pertaining to a global economy could ultimately echo quickly throughout an often dense foreign exchange market. Unless people trade currencies through an online brokerage account or a large investment firm, a huge difference in a strengthened US dollar may not be noticed for some time.