Recently an astute reader asked me this question.
"Gary, I am really curious why the US$ has been so strong for the last
year. Any hint? Sincerely, Rudy"
We may all profit from the research that went into my reply to Rudy.
First keep in mind that though the dollar has been strong, it is
falling now. At least in the short term. The January 7 Economist,
"The dollar suffered its biggest two-day drop against the euro in two
years, hitting a two-month low of $1.21 against the European currency
on January 4th. The dollar stumbled after the release of the minutes
of the December meeting of the Federal Open Market committee, which
signalled that interest-rate rises may be nearing an end."
The yen is also appreciating rapidly right now and of course gold is
But we should not speculate on a dollar collapse without caution. Let’s
look at some statistics and see all the pressures that might push the dollar
down and up.
First on the downside America’s trade deficit has been pushing down on
the greenback for many years. The huge negative current account deficit
is at 6.5% of Gross Domestic Product (GDP) and this also places downwards pressure
buck. Europe has a small current account surplus of 0.1% of GDP and
Japan’s surplus is very high at 3.3% of GDP.
Stock market moves in 2005 also favored Europe and Japan over the US.
Europe 's exchanges were up 9.7% overall. Japan’s market was up 25.5%
versus a 5.1% rise in the S&P and 4% NASDAQ growth. But right now
Wall Street looks strong at a time when it is traditionally weal.
Yet there are are plenty of reasons for the dollar to have some strength at this
First keep in mind the strength of its rebound. If we take a longer view,
the dollar has fallen seriously versus the euro. Sure its up
from its bottom back about a year and a half, but it is nowhere near
the parity it was few years ago. Part of correction now may just be a
Plus most countries want a strong dollar and many support the buck by
buying it. They want their products to remain cheap in America. US
spending has stimulated the global economy and no one wants this to
change, except American firms that export. So speculators have to
beware of government intervention.
Asian and other nations are also buying US businesses and or investing
in new plants in the US. This attracts money to America and increase
demand for the dollar.
In addition America is not the only economically mismanaged nation.
The US budget deficit, as bad as it is at 3.7% of GDP, is not that
much worse than Europe’s (-2.9%) and the US deficit is much better
than Japan’s horrible –6.5% of GDP.
Europe’s overall debt (if we can believe the statistics) is 71.3% of
GDP, about the same as in the US. Japan’s debt is seriously worse
whopping 144% of GDP, double that of the US!
US unemployment figures look pretty good at 4.9% of the work force
versus 4.6% in Japan and 8.8% in Europe.
Japan and Europe also share America's aging problem,
I suspect that the greatest US dollar strength has come from interest
rate differentials. 3 month dollar CD rates rose to 4.22% up from
2.54% in the last year. Euro CDs only pay 2.49% and the yen rate is
basically zero. Bond rates in dollars were also much higher, 4.36% for
ten year bonds compared to 3.29% in euro and 1.52% in yen.
For the year ahead watch the stock markets and interest rates. Plus
the price of gold. My guess (and predicting currencies is always a
guess) is that currencies with the highest interest yields and hottest
stock markets will be the ones that will see the greatest strength.
Plus the dollar yen and euro will weaken versus gold.
Until next message I hope your global investing sees great strength as