In economics and in financial data analysis, superlatives are generally avoided. (Certain financial news shows on cable TV are the exception, of course.) Specificity and moderation are the rules -- after all, we're talking about business and money.
Still, given the forces that have affected the currency markets in the early 21st century, one can safely say that there has never been a currency quite like the U.S. dollar.
Fed goes "superquantitative"
On top of the U.S. government's more than $1 trillion budget deficit, last week the U.S. Federal Reserve announced that it was broadening its monetary policy of quantitative easing to further loosen constrained credit markets. The Fed announced it would be buying Treasuries, a tactic known in economics circles as going "superquantitative."
This last bit of monetary easing by the Fed would be the dollar's undoing, the inflation hawks said, predicting that the dollar's value would decline against the world's other major currencies.
And the dollar did fall after the Fed's decision, fanning fears of rising inflation. China, a major holder of U.S. bonds, became so concerned about the dollar's potential decline that it called for a new international currency order, one in which a basket of currencies or new currency would serve as the new reserve currency.
Dollar is hanging in there
But before you convert your stock and bond holdings to 70 percent 1 kg gold bars, you may want to research things and wait awhile: the dollar is rallying. You read correctly: the buck is not done yet. Incredibly, the dollar strengthened 2.5 cents versus the euro to $1.3278, 2 cents versus the British pound to $1.4295, and 1.8 cents versus Swiss franc to $1.1454 Friday.
Why is the dollar mounting yet another comeback? Currency Trader Andrew Resnick said traders now believe economic conditions on the European continent (the euro-zone) and in the United Kingdom are worsening, and that the United States is, relatively speaking, in a better position.
"The consensus has now returned to the economic cycle theory, where traders believe the U.S. economy will come out of its recession before Europe and the U.K.," Resnick said. "If that's the case, that boosts the attractiveness of U.S. investments, which is bullish for the dollar." Resnick added that he is presently flat, his normal currency position for a Friday.
Still, it seems implausible that a country with a national debt likely to exceed $12 trillion soon and with its central bank pumping money at a record pace would see a stable currency. "In normal times, we wouldn't. In normal times, the dollar would be in serious trouble now. ... But there's sentiment that the European Central Bank will have to expand their money supply too, to facilitate borrowing and business activity. That weakens the euro," Resnick said. "Everyone sees the ECB buying bonds in Europe soon to increase its money supply, and that helps the dollar."
Longer term, Resnick said, as the global economy recovers, the U.S. must cut its budget deficit, or U.S. interest rates will rise, as capital flees to other markets to secure higher-return equity investments. For now, "we're getting a reprieve, a chance to fund our fiscal stimulus without high interest rates or a large drop in the dollar's value," he said.
Forex/Economic Analysis: As trader Resnick outlined, the United States remains a very fortunate country, in terms of its currency. No other nation in the world could run a record budget deficit, have its economy fall into a recession, and see its currency hold it own against the world's other major currencies. Further, after the U.S. economy's recovery is firmly in place, that's all the more reason for President Obama and Congress to cut the U.S. budget deficit and begin paying-down the national debt: the low-interest-rate period produced by the huge flight-to-safety by institutional investors and by "mutually-bad economies" on both continents won't last forever, hence the smaller the U.S. budget deficit is, the lower the U.S.'s interest costs will be when the recovery starts.