The dollar has looked good against the stumbling euro in the past year. But it’s a different story compared to the yen and other global currencies
The euro and dollar are more currency chumps than champs lately. Sure, the dollar has strengthened against the euro in recent weeks as Europe’s debt crisis continues to fester. But there are many reasons to dislike both currencies.
The Federal Reserve has already said that it is likely to keep its key overnight lending rate near zero until mid-2013. Low interest rates are an enemy of a currency as exchange rates tend to rise and fall with them. And it would not be a major surprise if the Fed, which just disclosed Tuesday in minutes from its latest meeting that it intends to start publishing interest rate projections with quarterly economic forecasts, extends the zero rate pledge until 2014 sometime soon.
For one, the U.S. economy remains in a low and slow “recovery”. What’s more, several of the more hawkish (i.e. inflation fighters generally in favor of less stimulus) members of the Fed’s policy committee are out this year and will be replaced by Fed regional presidents with more dovish leanings.
That adds up to a weaker dollar, especially if the Fed announces a third round of bond purchases, or quantitative easing, to keep long-term rates low. QE3 is far from certain since some market experts and politicians have warned about an eventual inflation spike if the Fed keeps printing money to buy debt.
While the U.S. has a looming debt problem, Europe is already in a full-blown crisis. And it may be impossible for the different nations in the eurozone to come up with a quick and neat solution. That’s why the euro, which Wednesday morning slipped back toward the 17-month low of $1.28 that it just hit last week, may continue to fall in the next few months.
“Europe is a mess. They still don’t know what they want to be. A political union? A monetary union? They need to make a decision,” said Michael Woolfolk, senior currency strategist with Bank of New York Mellon.
Nonetheless, investors should not mistake any more gains that the greenback may make on the euro as a sign that the dollar is almighty once again.