How High Can the Dollar Go?

The trade weighted U.S. dollar index versus major currencies is a clear measure of the strength of the US dollar. The Federal Reserve Bank of St. Louis graph shows the fall and then rise of the dollar over the last five years.

Trade Weighted US Dollar Index

The U.S. dollar has risen twenty percent in the last year compared to a basket of major currencies. Why is this? How high can the dollar go?

Economic Recovery

The U.S. economy is in a slow but steady recovery while Europe, Japan and China have been flirting with a return to recession. Time Money reports that U. S. consumer spending is up, the latest sign that the economy is getting back on track.

U.S. consumer spending recorded its largest increase in nearly six years in May on strong demand for automobiles and other big-ticket items, further evidence that economic growth was gathering momentum in the second quarter.

The Commerce Department said on Thursday consumer spending increased 0.9% last month, the biggest gain since August 2009, after an upwardly revised 0.1% rise in April.

A stronger economy means a strong dollar and with the strongest of the major economies the US currency may still go up higher.

Interest Rates

Investors and currency traders are keeping tabs on comments by members of the U.S. Federal Reserve. The expect Fed move to raise interest rates will in all likelihood kick the dollar higher too. According to The Wall Street Journal, the most recent comment is that a rate rise by September is likely.

Federal Reserve governor Jerome Powell predicted the U.S. central bank will begin raising short-term interest rates as soon as September, with an additional rate increase coming in December.

Mr. Powell said he expects significantly stronger economic growth after the first quarter, further gains in the job market and “a greater basis for confidence” that inflation will rise toward the Fed’s 2% target-a combination that could lead to a September rate move.

It has been the expectation of higher interest rates that has largely driven the dollar higher. When expectation becomes reality the dollar will likely climb more. How high can the dollar go? The dollar cannot go up forever because doing so would make US exports too expensive and con-competitive. At some point a high priced dollar will hurt the US economy and start to fall.

How High Will the Dollar Go?

The Economic Times hazards a guess this subject. They believe that the dollar may go past 100 against a basket of major currencies.

US rates will go higher, there is no question about that. But the only question is when it will happen. After rate hike, the US will attract more money. Part of the turmoil will come from interest rates going higher. Of course, the US dollar will go over a 100, but my fear is that a year or two from now, the US dollar could literally turn into a bubble because people do not know what else to do with their money and there is turmoil everywhere.

This writer’s opinion is that the US dollar is the only game in town, or on the planet! With the strongest economy and rising interest rates how high can the dollar go? It may well be that 100 or above is not the cap.