Will The US Dollar Sustain Its Current Strength?

The US dollar is rising, a sign of the growing optimism in the economy. For other countries, a strong dollar means trouble. Majority of economic analysts predict that the US dollar will strengthen in 2017 to extend the gains that have boosted the value of the dollar by more than a third since the US credit downgrade last 2011.

Expectations focus on the strengthening economy that will likely allow the Federal Reserve to undertake its plan for multiple rate increases this 2017. Once the dollar rates increase, the US currency will become more attractive to investments in dollar-denominated assets which will attract more money to the United States. According to Christopher Stanton, chief investment officer of Sunrise Capital LP, there is serious pressure for everyone to sell their currency and buy dollars. Mr. Stanton has made a bet that the US dollar will appreciate against the Australian dollar, Japanese yen and the Euro in the coming months.

A stronger dollar means an increase in the buying power of US consumers and businesses because it makes imported products a lot cheaper including travel abroad. However, this will hurt the US exporters because their products will be less competitive in the global market. Corporate profits will fall which will potentially weigh on stock prices.

In the emerging markets, when the strength of the dollar is sustained, it could undercut prices for oil and other dollar-denominated commodities and put pressure on developing economies that export raw materials. It would be more difficult for emerging-market companies as well as governments that have borrowed heavily on the US dollar to service their debt payments.

According to Alan Ruskin, the head of G10 foreign exchange strategy of the Deutsche Bank, the dollar energized due to the expectations of fiscal stimulus under the Trump administration. On the other hand, there are worries that the president’s proposals on infrastructure spending and tax cuts may not materialize.

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