Everyone Is Wrong about the U.S. Dollar
When everyone agrees on something, it’s much more likely that everyone is wrong than everyone is right. Universal consensus about the end of the dollar makes me think it won’t happen.
Several things move currencies: Economics, interest rates and politics. I’m going to show you why each of these areas points to a rising dollar than a falling one.
Several economic factors affect the value of a currency, including unemployment and growth in a country’s gross domestic product, or GDP. The U.S. is much more likely to improve in these areas in the next 12 months than it is to worsen.
Unemployment is about 9.7%. The only time unemployment has been this high in the past 50 years was for a one-year period from mid-1982 to mid-1983 — after which the joblessness rate fell rapidly.
The quarterly GDP growth rate in the U.S. has been negative for about a year. This period of negative growth has been longer than recent declines, but it is showing signs of abating.
The most recently ended quarter showed a stark improvement from previous quarters, and most forecasters expect positive growth to kick in before the end of the year.
When interest rates are high, the dollar becomes more attractive because people want to take advantage of those rates. When rates are low, investors seek to move to currencies that pay a higher rate.
U.S. interest rates are at all-time lows and have nowhere to go but up. The last time rates were anywhere close to this extraordinarily low level was in 1954, when rates spent a few months below the 1% mark. Now, saying rates have to go up isn’t much of a prediction. After all, they simply can’t go much lower.
#-ad_banner-#Periods of low rates are typically followed by periods of high rates. Some cite Japan as an example of rates hovering at low rates for an extended length of time. But the United States is not Japan, and our financial history suggests rates will soon rise as the U.S. economy recovers.
Political factors can go a long way toward eroding the value of a currency in a developing country. But the U.S. government is as stable and safe as a country gets. While events here and abroad can strike fear into the hearts of investors, any such panic is usually short-lived. Even the two wars the U.S. now fights don’t enter the minds of investors other than concern about how much the U.S. is spending on them. While crisis can strike at any time, the U.S. is prepared to meet any challenge, and any difficulty is likely to present, at worst, a short-term blip in the value of the dollar.
The U.S. Dollar Is Likely to Appreciate Going Forward
Most of the factors that push the dollar lower are near their bottoms and seem poised for good news. The “dollar index” points to the same conclusion. It’s at a historical low.
The dollar will experience volatility during the next several months, but I’m convinced the dollar will be stronger 12 months from now than it is today. The herd is betting against the dollar. I’m looking to go against the crowd with PowerShares DB US Dollar Index Bullish (NYSE: UUP), an ETF that is designed to go up when the dollar appreciates against a basket of global currencies.