Are the Bears Going to Eat the Dollar?

The dollar may have seen its best days after a nice run up. The promise of an American economic boom, higher interest rates and money pouring into the USA helped drive the dollar up. Now it appears that the boom may be postponed along with Trump’s economic agenda and the Fed will be taking its own sweet time raising interest rates. It is no wonder as Bloomberg says that investors are turning bearish on the dollar.

Dollar bears are back from the wilderness. The currency slid to the lowest since November on Wednesday, and options show investors are becoming more pessimistic on the greenback versus the euro and yen. The dollar has almost erased its gains from the so-called Trump Trade, as pro-growth policies from the presidential administration have yet to materialize. UBS AG’s wealth-management unit recommended selling the dollar against the euro, and JPMorgan Chase & Co., the world’s second-biggest currency trader, advised clients to ditch bullish bets in the short term.

Are the bears going to eat the dollar or just take a few bites before moving on? In other words what is the longer term forecast for the greenback?

Better Outlook for the Long Run

The EconoTimes writes that while the dollar is weakening in the short term the long term outlook is upbeat. They cite various economic indicators which make the point that things are not all that bad for the dollar.

What Does the Fed Think?

The U.S. Federal Reserve raised rates which fact means that they think the economy is gradually recovering. What the Fed does is data driven and job gains and firming inflation increased their confidence in higher rates.

The U.S. Federal Reserve raised interest rates on Wednesday for the second time in three months, a move spurred by steady economic growth, strong job gains and confidence that inflation is rising to the central bank’s target.

The decision to lift the target overnight interest rate by 25 basis points to a range of 0.75 percent to 1.00 percent marked a convincing step in the Fed’s effort to return monetary policy to a more normal footing.

Fed Chair Janet Yellen pointed to growing faith in the economy’s trajectory.

“We have seen the economy progress over the last several months in exactly the way we anticipated,” Yellen said in a press conference following the end of a two-day policy meeting. “We have some confidence in the path the economy is on.”

Thus it would seem that while the bears are going to eat the dollar in the short term they are probably only taking a few bites before going away. Trump or no Trump the economy is recovering and will require periodic interest rate increases to forestall inflation. That will keep driving up the dollar in fits and starts. It is only if the Republican administration and congress get their act together and ramp up the economy to a medium boil that rates and the dollar will really go up.