From it’s low in May of 2014, the dollar has posted 32 weekly highs against the Euro. Most experts are predicting the strong dollar rally to continue through 2015, but can the dollar continue it’s impressive rally?
Reasons for the dollar rally to continue
The dollar is currently the only major currency with improving growth prospects:
- The Commerce Department has revised the estimate for GDP growth to 5% – the highest rate in 11 years!
- The growth is coming from personal consumption and business investment, which are the largest and most influential components of GDP.
- The consumer is happy – recording the highest level of consumer sentiment since 2007.
- Lower gas prices are giving the consumer a shot of financial caffeine by freeing up more cash that is being spent in other sectors of the economy.
- The current unemployment rate is 5.6% and trending lower.
- The Fed has implied they might begin to raise interest rates as early as April 2015. Higher rates in the US mean more demand and higher prices for the dollar.
- Most major economies are stagnant, slowing, or both. Europe is on the brink of another recession. Japan continues trying to jump-start its economy with more stimuli. China shows signs of slowing growth. Britain is mired in stagnant growth.
These signs are real, and investors across the world are buying dollars at an extraordinary scale. With such a strong case for buying dollars, you may be wondering, ‘why is Shawn writing this article?’
Reasons why the dollar rally may not continue in 2015
Well, in reality, the dollar may not be as sure a bet as most pundits are pedaling.
- The strong economic projections have already been priced into the market. The dollar index has strengthened over 9% since May of 2014.
- Sequentially stronger economic reports in the form of “stronger than expected” data will be needed to keep the trend alive. With data coming in as expected, the dollar is just as likely to drop as it is to go up. Reports that are worse than expected will surely have a negative impact on the dollar.
- It is not certain whether the Fed will raise rates this year. The Fed will only raise interest rates when the economy nears full capacity and inflation starts heating up. Currently, the five-year forward projection for inflation is the lowest it’s been since 2011.
- Unemployment numbers have been dropping partly because a large number of workers between the ages 25-50 are leaving the workforce. There is evidence that that trend cannot continue, and those people will be re-entering the job market-putting greater pressure on wage growth.
- Financial turmoil in the global economy could flare at any moment. Any financial problems abroad could put downward pressure on the dollar as governments that hold US treasury debt start dumping bonds to support their domestic currency and stabilize their financial system (a flood of selling in the bond market would drive up yields, and put the brakes on growth in the US).
With all the uncertainty in the global financial system, it is difficult to project over long time frames. This is an argument for a good short-term analysis with nimble response. Try not to let your opinion be swayed by the experts. If you are quick to recognize momentum shifts, you should be able to weather the storms that are sure to happen!