January 26th Weekly Market Update
Unlike the footballs that the New England Patriots used in the AFC Championship game against the Indianapolis Colts, the U.S. dollar has remained well inflated. The dollar, which has been trending higher for nearly four years now, rose 13% in 2014 and is up another 5% so far in 2015. The latest leg up has been driven by anticipation and arrival of quantitative easing (QE)by the European Central Bank (ECB). Bold stimulus from the ECB, and other central banks around the world including the Bank of Japan, has put substantial downward pressure on the euro, the yen, and other currencies, while boosting the dollar. In general, more supply of a currency drives down its value. In this week’s commentary, we discuss some of the causes of the strong U.S. dollar and some of the most important implications for investors.
The U.S. dollar is strong for a number of reasons, all of them good things. Relatively strong U.S. economy. Our economy has been outperforming most international economies in recent years — especially the developed economies that are our biggest trading partners in Europe and Japan. A relatively good (even if not great) economy has helped boost U.S. financial markets and made the U.S. a more attractive destination for foreign capital.
Improving trade balance. The U.S. trade balance has improved dramatically, thanks in large part to the boom in U.S. energy production and resulting drop in oil prices that has reduced U.S. imports and increased exports. By keeping more dollars here at home, a smaller trade gap is bullish for the dollar.
For the full article: NO DEFLATING THE U.S. DOLLAR