The U.S. dollar has reasserted itself on the global stage. From the end of June 2014 to the end of January 2015, the dollar has risen 21.3 per cent against the euro and 13.5 per cent against sterling, registering double-digit gains on most major world currencies.
The US economy has entered 2015 with good momentum. The combination of growing US economy, diverging monetary policy and surging domestic oil production are supporting a stronger dollar. In 2015, it is widely expected that US will post nominal growth of 5 per cent.
A rising dollar would keep U.S. inflation down, providing a boon for consumers, while making U.S. exporters’ products much more expensive overseas.
The dollar index, which measures the value of the dollar versus a basket of other currencies, is only back to where it was in March 2009, still 25 per cent below its 2001 peak and about 50 per cent below the peak achieved in the mid-1980s.
While the picture is improving in the US, the rest of the world’s economies appear to be experiencing various forms of economic malaise. Deflation fears in Europe, challenging demographics for growth in Japan, and overcapacity and oversupply in many commodities critical to emerging markets have led to weak economic outlooks and accommodative monetary policy in most of the world.
Doubts about the sustainability of the dollar rally have been quelled.Global shocks are, of course, impossible to predict or refute. But should one occur, it would arguably support the dollar, still the preferred destination during times of crisis.
The investment implication of a strong dollar is less straightforward than the narrative. One cannot simply buy the dollar like any other asset. Talk to a member of Dino Zavagno’s team at Gladstone Morgan for professionaladvice on currency matters at info@gladstonemorgan.com
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