- For example, in July 1 Australian dollar was worth $0.98 US. By, August 30, this had fallen to 0.78 - quite a marked fall.
- In July 1 US $ was worth 0.62 Euros. By Sept 10 this this had risen to 0.71 Euros.
- In July 1 US $ was worth £0.5 By September 11th this had risen to £0.57
Firstly, the US economy is weak.
- Growth is slowing down (annual growth rate of around 1.3%)
- Interest rates are very low (2%)
- Unemployment is rising
- Current account deficit is still a high % of GDP (despite recent improvements)
- Concerns over Financial system, highlighted by the failure of major banks
The main reason for the dollar's appreciation is the realisation that maybe the dollar has been oversold in its long bear market since 2001.
The other important reason is that there is a growing awareness the economic troubles which began in the US, have spread to the rest of the world. In fact, it appears that the Eurozone will be the first to enter an 'official recession'.
The dollar's recent strength is therefore not a thumbs up the underlying economic conditions of the US, but, a reflection of the European slowdown. (see: Euro economy first into recession)
With US interest rates at 2%, there is little further that they can fall (especially with inflation nudging towards 5%). However, in the Eurozone, interest rates are more than double that in US. The slowdown in the Euro economy has been quite marked and it raises the real possibility of lower rates in Europe. It is these lower interest rates in the UK and Europe that will reduce demand for the dollar.
Prospects for US Dollar in 2009The US, has so far avoided an official recession (helped in part by a weak dollar, which has boosted exports). However, the credit crunch shows no signs of reaching the bottom. 2009, is likely to bring more bad news for the economy. How many banks will need rescuing like Freddie Mac and Fannie Mae? The economy will slowdown further in 2009, and this will make the dollar weaker.
However, with a global slowdown, the US dollar will not be much weaker than other currencies.
This short term appreciation in the dollar does not reflect a return to a strong dollar. This will only come if the US can overcome fundamental problems such as:
- Structural current account deficit
- Unbalanced economy - high debt both private and public
- Problems in Financial sector. How many more banks will go under? Can the financial system cope?