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Can the Dollar Continue Its Upward Trend?

What's the Latest Development?

The dollar is gaining in value relative to other world currencies, which economists say is due to several very recent changes in the economy. "The immediate spur for optimism about the dollar is the recent signalling from the Federal Reserve that its purchases of bonds with newly created money may start to tail off as soon as September. The prospect of an end to quantitative easing has already pushed up long-term interest rates. The yield on ten-year Treasuries has risen to 2.6% from a low of 1.6% in May. As yields rise, capital is attracted to America from riskier parts of the world. That in turn pushes up the dollar."

What's the Big Idea?

There are also longer-term reasons why the dollar is gaining in value. Principle among those is that the economy continues to gain in strength. "Bad mortgage debts have been cleaned out of banks. The housing market is recovering. Jobs are growing steadily. Non-farm employers added 195,000 workers to their payrolls in June, in line with the average increase so far this year." The dollar has made the most ground against developing economies, which depend on foreign capital to finance their trade deficits. "A handful of countries, including India and South Africa...have already seen their currencies fall by around 10% since the beginning of May, merely on the prospect that the Fed might take its foot off the monetary-policy pedal."

Photo credit: Shutterstock.com

Read it at the Economist

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