U.S. Dollar Appreciated the Most Since 2005

Over the last weeks the U.S. dollar has rallied at the fastest pace since 2005. For instance, just in a month the greenback appreciated 12% against the Australian dollar, 8% versus the euro, 7% versus the pound and 3% versus the yen. The question here is what is behind that unexpected rebound in the U.S. currency and if dollar strength will continue going forward.

As difficult it may be admit, the recent bounce back of the greenback, it's less based on the strength of U.S. fundamentals than on the weakness of other major economies. In fact, whichever country has manage to escape the global fallout from the US sub-prime mortgage crisis, has been affected by the impact of rising energy costs on consumer spending, tumbling business confidence and slower growth elsewhere in the world. For example, the Euro Area and Japanese economies shrank in the second quarter of 2008 and United Kingdom is likely to stagnate soon.

Considering other countries situation, the U.S economic condition looks slightly better. Indeed, taking into account the recent surge in export sales, boosted by the long weakness of the U.S.  dollar, the United States economy is likely to keep the GDP growth rate on the decent level. Moreover, falling oil prices are expected to ease inflationary pressures and help the U.S. economy to avoid recession. In the near future, at the same time some major economies will be forced to cut rates. On the other hand, the U.S Federal Reserve is likely rates attracting more foreign capital and helping lift the dollar further.

Anna Fedec, contact@tradingeconomics.com
8/20/2008 2:17:53 PM