The Climbing Dollar

Written by: Stone Cai

Recently the WSJ published an article giving several reasons why the recently climbing dollar can be expected to stop climbing in the coming months. First, the article makes an emphasis to show how the WSJ dollar index is calculated. It is a unique index that takes into account the currencies of important trading partners of the US. Next the article considers economic indicators as reason why the dollar should stop climbing. September to October consumer confidence index feel from 103.5 to 98.9. In addition, inflation increased by 0.3 percent during that same time period. These factors indicate that the Fed will likely be unable to raise interest rates as high as they would like as they want to stall monetary stimulus too much. This inability prevents too much currency appreciation. Considering all these pieces of information, the article is bearish on the ability of the dollar to appreciate even further.

At the time the article was written, David Woo of Merrill Lynch predicted the dollar to fall 10 percent against Euro and Yen in a political gridlock as result of U.S election. He also predicts that fiscal stimulus is hard to pass during gridlock. Though obviously, in the aftermath of the election results we have yet to see exactly how things should unfold.

The article also discusses the implications of a likely weaker dollar. Recall that a weaker dollar helps account trade deficits as US products are less expensive overseas. This should also ease the corporate earnings pressure facing US companies.

When it comes to the YTD looks the article predicts that the dollar should not rise beyond 91 on the WSJ index which is the year high from February. Finally, the article predicts that a weaker dollar will undermine the efforts of European and Asian central banks to be relatively weak against the US dollar.