Currency News: Central Bank Activity Sends Dollar Surging

For the past eight months, the US dollar has appreciated on a trade-weighted basis at a faster pace than during any period of the same time previously. More than 20 central banks have initiated quantitative easing programs this year, including the European Central Bank. It launched its quantitative easing program devaluing its currency against the dollar.

currency news

Some have claimed that the US has become a victim of what is called “currency wars,” as the increased strength of the dollar was a big part of the reason for downward revisions in the Fed’s growth and inflation forecasts. In reality, the strength of the US dollar, which has averse effects on US businesses, is a result of fundamental and economic divergence versus the rest of the world. The European Central Bank did not start quantitative easing to devalue the euro versus the dollar, but as a reaction to the risk of entrenched deflation that the eurozone faces.

At its meeting in March, the Federal Reserve also announced that increased interest rates would be on the table in June, September, and December, but not in April. The cyclical divergence in policy is natural, as the Fed is far more advanced than other countries in its post-2008 financial crisis rehabilitation. The US is also a primary beneficiary of the decline in energy prices. The dollar is likely to continue to increase, as market trends point to an increase in interest rates sometime this year, while other markets are years away from easing their new quantitative easing programs.


Comments are closed.