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Rebounding Dollar?

Rebounding Dollar?

The United States dollar staged its biggest weekly gain against the euro in almost four years.  After starting a strong rally last year, then retreating in March following a string of soft American data and stronger European data, the dollar increased almost four percent against the euro in the week ending May 22 to close at slightly above $1.10 per euro.  The Bloomberg Dollar Spot Index, which measures the dollar against ten major trading partners, increased by about two and a half percent for the week, as did the Wall Street Journal Dollar Index.

Recent negative economic numbers affecting the dollar’s relative value against other currencies include a first quarter growth rate of only 0.2%.  However, increased “core” (excluding food and energy components) consumer price inflation and housing construction in April, in conjunction with lower unemployment figures, are steering the United States central bank – the Federal Reserve – toward raising the federal funds rate later this year for the first time in over eight years, then continuing rate increases at a gradual rate.  This in turn is driving a stronger dollar once more.  Additional data next week in the form of housing, durable goods orders and consumer confidence level might further clarify whether the dollar should continue strengthening against foreign currencies.

What does a stronger dollar mean?  For the American consumer it means cheaper imported goods and foreign travel, which will also tend to keep price inflation low.  However for the American equities investor it means reduced foreign demand which decreases the value of profits earned from foreign sales.  Commodities investors can expect the strong dollar to reduce the value of investments such as gold and other precious metals.

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