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Where's the dollar headed from here? Well, if you're in the camp that argues both monetary and fiscal stimulus guarantee rising inflation, the dollar will trend lower in the immediate quarters ahead, and probably for longer.If you're in the camp that argues that given asset destruction, and massive job lay-offs, pricing power is non-existent, the dollar will hold its own against the world's other major currencies.
The dollar traded Thursday down about one-half cent at $1.4261 and $1.6204 versus the euro and British pound, respectively.
Another factor working in favor of the dollar? U.S. GDP growth. The currency market is starting to price-in capital flight from the U.S. to healthier emerging market economies, particularly those in Asia, which are likely to register impressive growth rates as the global economic recovery takes hold. All other factors being equal, capital chases return, and most economic models show more robust growth in Asia, not the U.S., in the recovery's initial stage.
However, U.S. GDP growth could surprise to the upside. To be sure, no one expects the United States to return to Clinton administration-era, 300,000-job-gain months, but the recovery could be stronger than expected in Q3/Q4 2009 and Q1/Q2 2010, particularly if the U.S. housing sector snaps back quicker.
And the latter scenario would be bullish for the dollar, leaving the dollar bears on the short end of a dollar-short stick.
Financial Editor Joseph Lazzaro is based in New York.
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