Sunday, May 15, 2011

Is the U.S. dollar at an “inflection point”?

Often U.S. government officials talk about the desire for a “strong dollar”. However, assessing if a currency should be “strong” or “weak” relative to the value of other foreign currencies is a complex topic. In recent months, a declining U.S. dollar has helped increase U.S. exports, while reducing the amount of goods imported from other countries – a situation that helps create jobs and improves the trade balance. This week, the value of U.S Dollar increased by 1.5% versus the Euro and by 1.2% against a basket of major foreign currencies.

MY TAKE: When the U.S. Federal Reserve started its QE2 stimulus efforts last fall, the value of equities and commodities increased, while the value of the U.S. dollar declined. Today, investors must consider 1) the implications of the end of the QE2 stimulus process and 2) economic challenges outside of the U.S., such as increased concerns about the stability of the Eurozone “peripheral countries”. These dynamics have the potential to increase the value of the U.S. dollar. If this occurs, investors, companies and governments around the world will have to adapt their strategies to this new market environment. Note: In the short term, many currencies trade on technical considerations. The current move suggests that a fundamental change may be underway.

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