Reasons the U.S. Dollar Will Continue to Get Stronger
The U.S. dollar has been on a tear as of late, hitting highs against the euro and other key currencies in the past few months, but what has buttressed this ascent and can it be sustained?
Here are three reasons to continue to stay bullish on the dollar:
The U.S. is the pick of the litter among prominent world economies, according to the IMF and World Bank, while many larger economies struggle to find growth. The U.S. is also in the midst of its longest consecutive period of payroll growth in its history, and started the year off continuing this trend by again, beating expectations in January. The U.S. economy by most any quantitative metric is doing well, especially on a relative basis. Unsurprisingly, this has attracted investors looking for safe growth.
The aforementioned data does much to instill investor confidence in the U.S. economy and subsequently makes it a favorable destination for investment, which means you must own dollars. Additionally, we have ended quantitative easing here, meaning bond yields should be more attractive than in places that currently have bond-buying programs. The European Central Bank has just begun a massive $1.2 trillion program of its own; Japan is continuing their purchases; and the People's Bank of China has alluded to easing as well. A prominent result of these bond-buying programs is the raising of bond prices, which causes their yields to drop. Yields from government debt is already difficult enough to find as it is, with interest rates for many top economies incredibly low if not negative. Investors are seeking both safety and something that offers some semblance of a return; the U.S. at the moment is the best of both of those worlds.
Why is this relevant to supply and demand for the dollar? Because if investors wish to buy U.S. treasuries or any form of U.S. dollar-denominated debt, they must do so in dollars. This means they must convert their currency to dollars, sparking increased demand which invariably leads to an increase in value.
3. Lack of inflation
Many predicted rampant U.S inflation from years of bond buying from the Fed, flushing the market with liquidity. While not an outlandish conclusion, it just frankly is nowhere to be found in any material amount. The most recent reports released in January peg it at a nominal .8%. While the Federal Reserve would like to see a bit more, and deflation being insidious for its own reasons, this lower-end happy medium has lent more confidence to the dollar as it's showing its purchasing power domestically is very much intact.
It's pertinent to note that there are multiple countries that have low inflation or are very safe regarding a return of principal; however there are none that possess all the aforementioned traits simultaneously. It's when all these factors are coalesced that the dollar is placed in a somewhat unique light. No country has the growth projections, the safety, the lack of inflation, and the return the United States has right now. As such, investment interest in America is strong and it appears that it will continue to be for the foreseeable future. Expect the U.S. dollar to continue to be a safe haven currency and remain strong going forward
source : http://www.thestreet.com/story/13047038/1/3-reasons-the-us-dollar-will-continue-to-get-stronger.html
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