When Is the Dollar Going to Go Up?

When is the dollar going to go up again? It had a nice run from 2011 to the end of 2015 when traders considered the prospect of higher interest rates. Then the dollar started to fall when traders realized that the U.S. Federal Reserve was not going to be overly aggressive in raising rates. The Federal Reserve Bank of St. Louis provides a graph showing the Trade Weighted U.S. Dollar Index versus a basket of major currencies.

A weighted average of the foreign exchange value of the U.S. dollar against a subset of the broad index currencies that circulate widely outside the country of issue.

Major currencies index includes the Euro Area, Canada, Japan, United Kingdom, Switzerland, Australia, and Sweden.

Markets are currently waiting to see how many times the U.S. Federal Reserve decides to raise interest rates this year. With that thought in mind, what the Fed says is important.

A Recipe for the Dollar to Go Up

Bloomberg Markets says that a Fed communication shift is the recipe for the dollar to go up against everything.

The market reaction to the minutes from the Federal Reserve’s April meeting shows monetary policymakers engineered an ideal environment for the U.S. dollar to thrive, according to Société Générale SA global strategist Kit Juckes.

Wednesday’s communique proved surprisingly hawkish, indicating that most officials believed a hike in June would be likely should economic activity continue to firm—and suggested that markets hadn’t adequately priced in this possibility.

The odds of a rate hike in June implied by federal fund futures proceeded to spike in the aftermath of this release.

So, when is the dollar going to go up? It is rising right now due to the hawkist tone of the minutes of the most recent Federal Open Market Committee meeting. There is evidence that even as gas prices remain reasonably low that wage and price inflation are taking hold and it is the prospect of inflation that will drive the Fed to raise rates and thus drive up the dollar.

The Economies of USA and the Rest of the World

The Fed focuses on the US economy when modifying their monetary policy. However, in our globally interconnected world it makes a lot of difference if other large economies are doing well or not. According to the Guardian, Japan dodges recession with 0.4% growth for the first quarter of the year.

Japan sidestepped a recession with annualized growth of 1.7% in the first quarter of 2016, preliminary data showed on Wednesday. But the reading underscored how the drive for a firm recovery in the world’s number three economy is not gaining traction.

Meanwhile in the EU The Telegraph notes concerns of a Swiss bank that result of a new recession would lead to a Eurozone collapse.

In a research note titled “Close to the edge”, economists at Swiss bank Credit Suisse warned the fate of monetary union hangs in the balance if Europe’s policymakers are unable to ward off another global slump and quell anti-euro populism.

“The viability of the euro is contingent on the current recovery,” said Peter Foley at Credit Suisse.

And China seems to have come to the end of its period of miraculous growth. The International Business Times says the IMF believes that an economic crisis in China could lead to a global recession.

An economic crisis in China could result in a world-wide recession, warned the International Monetary Fund (IMF). This was because China’s financial links with the rest of the global economy was set to increase, the organization said ahead of its spring conference in Washington next week. “It is likely that China’s spillovers to global financial markets will increase considerably in the next few years”, the IMF said.

Thus the immediate answer to when is the dollar going to go up is, right now and for the foreseeable future as the Fed intends to raise rates. However, global events could catch up with the U.S. economy and a weaker U.S. economy could drive the dollar down.