US dollar 2011

In this article I have discussed the current US dollar trends: where the downward pressure is coming from, what opposing forces are working to maintain its value, and what is in store for the dollar in terms of its global dominance.

Where is the downward pressure on the US dollar 2011 coming from?

The dollar stands to benefit from stronger economic results in the US in the first quarter of 2011, but with the rest of the world seeing similar improvements, their Central Banks are set to raise their interest rates before the Federal Reserve does. This will attract investors, and high yielding currencies will be likely to rally at the expense of the US dollar. Only if there is a higher than expected recovery in the US markets further into 2011, or further problems in the Eurozone will investors remain interested in the US dollar, low rates or not.

As things are now, however, The US public debt is surging, interest rates are close to zero, and risk taking investors are shunning the dollar in ever increasing amounts.

What is keeping the dollar going now?

The continued uncertainties in Europe over fiscal crises in Portugal, Greece and Ireland. This has led to a shift of capital from the Eurozone to the US. The budget-busting tax cuts of last year increased economic growth and led to the Federal bank deploying less of its money.
Long-term rates are edging upwards, and a certain section of the investment community are taking notice of this. As a consequence, US bonds are of interest again to investors.Also, whilst in the last few decades there has been a global move away from the US dollar, it still accounts for nearly 63 percent of the global Forex reserves. It seems that no other currency makes a good substitute, although the Euro and Yen have been proposed. This all in mind, and a number of renowned economists have announced that they consider the dollar to be safe, not just for the immediate future, but most likely in the long term.

So in the long term is the dollar really going to remain the number one currency?

The dominance of the dollar benefits American firms and residents in many ways, such as by reducing foreign currency uncertainty, and enabling firms to issue debt with attractive interest rates. This dominance, however, also makes it easier for the U.S. to buy and invest beyond what it is financially capable of.

The US is continuing to pursue fiscally irresponsible policies that are keeping the debt of the country high, and other economies are gaining world GDP share. This means that many experts believe that in the long-term, a global system containing two or maybe three principal currencies will surely be employed.

When we look at the alternatives, such as the Euro, Yen, or even gold, it is clear that the dollar by default, despite all the factors currently against it, should remain the number one currency for the foreseeable future. The Euro zone is in crises, Japan is aging, and no one has yet to challenge the U.S’s dominance. How long it will take for the dollar to be upsurged depends on whether the country restores fiscal sanity and on progress in Europe and emerging powerhouses such as China.

For more information, go to: