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The Strengthening U.S. Dollar

The Strengthening U.S. Dollar

The United States’ currency has recently attained its highest level in years when measured against many foreign currencies. For instance, the euro (€)began the year 2015 trading at about $1.20 in U.S. dollars – six months earlier it stood at $1.35. Expressed another way, a dollar six months earlier cost about €.73 but now would cost about €.83, signifying a rise by the dollar of almost 10%. (The “euro” is a currency in use since the 1990s by many countries which are members of the European Union.) This is the highest level for the dollar versus the euro in over four years, coming in the wake of comments by the European Central Bank President suggesting increased monetary stimulus in the near future which could further weaken the euro. Similarly, the dollar has increased by over 3% against the British pound (£)and over 2% against the yen (¥) during 2014.The U.S. Dollar Index, which measures the greenback against six major currencies, recently hit its highest level in over eight years.

Many of the factors accounting for this stronger dollar reflect the relative weaknesses of most of the world’s economies rather than strength of the American economy. The United States central bank – the Federal Reserve – appears ready raise interest rates in 2015, unlike other central banks such as those of the European Union as mentioned above or Japan’s central bank. (Fixed-income investors tend to buy currencies yielding the highest rates.)Furthermore, while the economies of many European and Asian countries have been showing little or no real growth, the United States has recently enjoyed several quarters of growth at an annualized rate of 3% or more. (Investors also tend to invest in the fastest-growing economies.) Finally, the U.S. trade deficit has been narrowing from increased domestic shale oil production –U.S.Energy Department estimates indicate that in 2015 imported oil will account for about 20% of U.S. consumption, down from 60% ten years earlier. (A decreasing trade deficit makes foreign countries more inclined to lend to the United States as a creditworthy borrower.)

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. For example, Coca-Cola expects the current quarter’s per-share earnings to be 9% lower and McDonald’s expects its fourth-quarter profits to be 6 cents a share lower because of the dollar’s recent strength. Commodities investors can expect the strong dollar to reduce the value of investments such as gold and other precious metals.

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