Why Is the US Dollar So Strong?

In the wake of the Great Recession the US Federal Reserve undertook to stimulate the US economy and drove down the value of the greenback. That situation has reversed. Why is the US dollar so strong today? Bloomberg reports that U.S. growth is part of the story.

The dollar advanced to highest level in more than six weeks as economic data in the U.S. continue to signal expansion, setting the world’s biggest economy apart from slowing growth elsewhere around the globe.

The U.S. currency strengthened versus most of its major peers as stronger-than-forecast construction in new homes added to evidence the economy is picking up steam. Citigroup Inc.’s U.S. Economic Surprise Index, which measures whether data beat or miss forecasts, rose to the highest since January 2015 following reports showing stronger payroll and retail sales. The International Monetary Fund scrapped its forecast for a pickup in global growth this year, while reiterating its call for a 2.2 percent U.S. growth.

A strong economy typically strengthens a nation’s currency but there is more to why the US dollar is so strong. It is the Federal Reserve and the prospect of higher interest rates.

Higher Interest Rates to Stave off Inflation

The US central bank, the Federal Reserve, is tasked with the job to avoiding or fighting inflation. It turns out that it is a lot easier to avoid inflation than deal with it once it gets going. The Fed is raising interest rates in an attempt to avoid inflation but not so fast as to choke off the economic recovery. The Wall Street Journal says that Fed officials believe they can raise rates this year due to healthier than expected economic data.

Federal Reserve officials are looking more confidently toward an interest-rate increase before year-end, possibly as early as September, now that financial markets have stabilized after Britain’s vote to leave the European Union and the economy shows signs of picking up.

Officials are almost certain to leave rates unchanged when they meet July 26-27, according to their public comments and interviews with officials. But the message in their post meeting policy statement could be that the economy is on a more solid footing than appeared to be the case when they last gathered in June, setting the stage for raising rates if the data hold up in the months ahead.

The US economy is the only really healthy large nation economy in the world. China has a more rapid growth rate but it is falling and money is flowing out of China and the Yuan is still falling.

China bet heavily on a robust economic recovery from the 2008 recession and took on a mountain of debt. That debt is now equal to its GDP and rising. Why is the Yuan still falling? Look at Chinese debt and at the dysfunctional system of Chinese government.

So long as the USA maintains a slow but steady economic recovery and other nations falter the dollar will rise. And as the Fed raises interest rates Forex traders will plow more capital into dollar making the greenback even stronger.