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The U.S. Federal Reserve continues to expand its balance sheet. Further, the U.S. government is piling on debt and public borrowing at almost a faster rate than Mexico and Argentina did during "the bad old days" decades ago. And yet the dollar continues to hold its own against most of the world's other major currencies. The dollar strengthened about 2 cents against the euro and British pound Tuesday at mid-day, to $1.3190 and $1.4538, respectively. Just as significant, the dollar has strengthened about 11% versus the euro and about 22% versus the pound since October 2008.
Big factor: first in, first out
What's going on here? BloggingStocks asked economist Peter Dawson to provide some clarity.
"Three factors are at work. Most important is the economic cycle. The U.S. was the first to enter a recession and it will likely come out of it sooner than Europe and the U.K., so that's supporting the dollar," Dawson said. "Second, there's still considerable flight-to-safety by stock-shy investors, which almost always increases purchases of U.S. Treasuries, another dollar plus."
"Finally, with slack demand for commodities and commodity prices dropping or flat, inflation pressure remains low in the U.S., and investors generally like low-inflation environments," Dawson said.
Japan's yen, presently at 89.56, as an alternate safe-haven, has risen about 16% versus the dollar since October 2008, but otherwise the United States has managed (so far) to avoid a major devaluation in its currency, despite likely, back-to-back $1 trillion budget deficits, a national debt approaching $11 trillion, and a recession likely to contract GDP by 1.5-2.0% in 2009.
Still, the dollar's respectable level, all factors considered, should not deflect the nation from increasing domestic savings, eliminating its trade deficit, and, after the U.S. economy resumes growing, cutting its budget deficit, Dawson added. "The U.S. remains too dependent on foreign capital, and that has to change," he said.
Forex / Economic Analysis: China has recently sent signals that it may buy less U.S. debt in the quarters ahead, to keep the capital at home to spur its own economic recovery. If China followed-through with the above, U.S. interest rates would rise - - which is all the more reason the U.S. must decrease its budget deficit, after the U.S. economy gets back on a sustainable growth track.
Japan's yen, presently at 89.56, as an alternate safe-haven, has risen about 16% versus the dollar since October 2008, but otherwise the United States has managed (so far) to avoid a major devaluation in its currency, despite likely, back-to-back $1 trillion budget deficits, a national debt approaching $11 trillion, and a recession likely to contract GDP by 1.5-2.0% in 2009.
Still, the dollar's respectable level, all factors considered, should not deflect the nation from increasing domestic savings, eliminating its trade deficit, and, after the U.S. economy resumes growing, cutting its budget deficit, Dawson added. "The U.S. remains too dependent on foreign capital, and that has to change," he said.
Forex / Economic Analysis: China has recently sent signals that it may buy less U.S. debt in the quarters ahead, to keep the capital at home to spur its own economic recovery. If China followed-through with the above, U.S. interest rates would rise - - which is all the more reason the U.S. must decrease its budget deficit, after the U.S. economy gets back on a sustainable growth track.
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