Academic journal article ABA Banking Journal

What a Stronger Dollar Doesn't Mean

Academic journal article ABA Banking Journal

What a Stronger Dollar Doesn't Mean

Article excerpt

THE OTHER DAY SOMEBODY ASKED ME IF I thought the U.S. dollar would continue to depreciate or remain weak. My answer was: without any doubt, yes! However, since the financial crisis worsened :m August, the U.S. dollar has gained versus almost all world currencies. Some may argue that a recovery in the U.S. dollar indicates that the U.S. economy is not in such bad shape.

While it is true that the U.S. dollar has appreciated against other currencies, especially the Euro and emerging-market currencies, the truth is that it is not because the U.S. is better now. Rather, it is because markets are finally coming to terms with the fact that the rest of the world is in worse shape than originally thought. Thus, the U.S. dollar appreciation just looks like an imaginary oasis in the middle of the desert.

The fact is that since the financial crisis erupted last year, pundits argued that the rest of the world had been able, this time around, to de-link from the U.S. economic troubles. Thus, markets were betting that the U.S. economy was the only one going down in this cycle. Starting in August of this year, however, this perception started to change and capital started to leave other countries and come back into the U.S., thus helping the U.S. dollar appreciate versus other currencies. Some of the most affected currencies have been those of Latin America, which are highly dependent on commodity prices. …

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