US Dollar Rises On Rate Talk...Again

by: John M. Mason

Summary

Officials at the Fed are, once again, talking about a possible rate rise before the end of this year.

This, along with weak economies elsewhere in the rest of the developed world, has resulted in the value of the US dollar increasing.

The present conditions are not going to change drastically in upcoming months and so it can be argued that the value of the dollar will continue to increase.

Yesterday, the value of the US dollar hit the highest level in four months.

Indications that officials at the Federal Reserve might still consider…again…a rate increase this year seem to be the focal point of the dollar strength.

And, this morning, it was announced that US unemployment applications dropped to a 13-week low.

Plus, although the European Central Bank did not lower interest rates at its current meeting, it indicated that it might move to lower rates in the fall, possibly in September. The European economies are still on the edge.

Furthermore, a couple of days ago the Bank of England decided not to lower its rate, although it, too, indicated that it was still considering lowering rates because of the Brexit activities going on and the fear that Brexit will cause the British economy to slowdown in the near term.

Basically, we are in a situation where the United States may see its policy rate go up or at least not change. Although the US economy has grown at only a 2.1 compound rate of growth through its seven years of economic recovery, and expected future growth is not expected to be much different, the United States economy is one of the fastest growing economies in the developed world.

And, all other central banks seem to be considering cutting their policy rates further.

Not a very exciting economic outlook…but, it favors a stronger US dollar.

The value of the dollar is back around $1.1000 per Euro. On May 2, it was around $1.1500. In early March, it was down close to $1.0800.

The cost of a British Pound is below $1.3200, and has been as low as $1.2900, down from around $1.4900 just before the vote to leave the European Union.

The US Dollar index, as published by the Wall Street Journal, ended yesterday at 97.10. The day before Brexit, this index was at 93.37. On May 2, it was 92.64.

The officials at the Federal Reserve are still searching for a monetary policy. In all probability, we will not really see a coherent monetary policy coming out of the Federal Reserve for quite some time.

As far as the growth of the domestic economy, there is little that the Fed can do to produce much more rapid expansion. The Fed officials believe, given their published projections, that the US economy will only grow at about 2.0 percent over the next several years…barring another recession, of course.

And, this performance will continue to be one of the stronger economies in the developed world. This will mean that other central banks will be looking to protect their economies and err on the side of too much monetary ease.

In this scenario, the value of the dollar should continue to rise.

As I written before, I think US business should expect a Euro will only cost somewhere in the $1.06 to $1.08 range. The British Pound will reach $1.25 by the end of the year.

Officials at the Federal Reserve may not like this, but these levels will result from the economic problems that are going on around the globe, problems that the Fed can do little or nothing to resolve.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.