U.S. Dollar's Unexpected Rebirth

by John M. Curtis
(310) 204-8700

Copyright April 24, 2012
All Rights Reserved.                                         

               During the dog days of the financial crisis in 2008, the euro was flying high, with currency traders talking about the demise of the U.S. dollar.  Currency traders were even talking about dumping the mighty dollar as the world’s reserve currency.  When Federal Reserve Board Chairman Ben S. Bernanke began printing dollars in record amounts to save major U.S. financial institutions, some economists, including Libertarian-leaning presidential candidate Rep. Ron Paul (R-Texas) predicted the dollar’s collapse.  Blasting Bernanke’s bailouts of U.S. banks and the auto industry, Paul, who fancies himself as an “Austrian economist,” warned about hyperinflation and the dollar’s end.  “We’ve become more bullish on the dollar because the economic prospects in the U.S. are improving,” said Ken Diskson, currency director at Stanford Life Investments in Edinburgh, Scotland, telling the real story.

             European currency traders have no ax to grind in the U.S. election cycle, pitting incumbent Democratic U.S. President Barack Obama against his Republican challenger former Massachusetts’s Gov. Mitt Romney.  Romney’s been touting his economic credentials and bashing Obama’s, often referring to the president as the “jobs killer.”  But with the Labor Department reporting strong jobs growth since June 2010, adding around 4 million private sector jobs to the U.S. economy, Romney’s message doesn’t jibe with economists on both sides of the Atlantic.  “There are additional reasons, including problems in the periphery, and a weaker euro is required to help the transition to a better economic situation in Europe,” said Dirkson, referring to Europe’s sovereign debt problems in the Eurozone.   Romney and GOP have built their election strategy around a weak U.S. economy.

             After the U.S. Fed’s bailouts and quantitative easing [repurchasing Treasuries], some economists predicted the demise of the dollar.  Currency traders now predict a steady rise in 2012 of the dollar, related to real improvements in the U.S. economy.  Apart from March’s 60,000 jobs, the economy had been adding about 120,000 private sector jobs each month, dropping the unemployment rate to 8.1%.  If the trend continues, the country could add nearly 1 million jobs by Election Day, dropping the unemployment rate to under 8% and reducing the federal budget deficit to under $1 trillion.  With global GDP rising 3.5%, it’s expected to drag the U.S. GDP over 2%, maybe closer to 3%.  Despite doomsayers like Romney and Paul, the mighty U.S. economy is once again adding jobs and shrinking the federal budget deficit to under 7% of GDP, far less than the last GOP administration.

             Currency traders don’t lie about fundamentals in the U.S. economy.  They wouldn’t be going long on the dollar if they saw economic weakness, blowing the theories of Barack’s detractors.  All staked their reputations on the economy tanking under Obama.  When the International Monetary Fund, not a big fan of the U.S Fed, predicts favorable U.S. growth, you know they do so reluctantly.  When the IMF proposed an end to the U.S. dollar as the world’s reserve currency Feb. 11, 2011, the outlook for the U.S. dollar looked grim.  With the euro reeling from sovereign debt problems, the world leans not on the IMF but on the U.S. dollar.  It’s almost unspeakable to talk now about replacing the dollar as the world’s reserve currency.  Despite all the Fed’s intervention printing trillions of U.S. dollars, the foreign currencies traders are betting on a stronger dollar.

              More Treasury purchases by the U.S. Fed could change the dollar’s upward trend.  U.S. exports suffer with a strong dollar, something the Fed may change in the future.  “Prospects for QE3 had never left the table,” said Michael Woolfolk, senior currency strategist at the Bank of New York Mellon Corp., the world’s largest asset manager with over $ 26 trillion on the books.  If the stock market keeps rising and companies continue to add jobs, it may be unnecessary for the Fed to start a new round of quantitative easing.  “QE3 would send a signal that the Fed wants to continue to grow the balance sheet and continue with the foot on the accelerator in terms of monetary policy,” said Woolfolk.  With or without QE3, the U.S. dollar will remain strong as long as the Eurozone faces insolvency.  When the stock market expands and companies add jobs, it doesn’t matter how much cash the Fed prints.

             Weakness in the Eurozone and U.K. should keep the dollar strong for the foreseeable future, regardless of how much cash the Fed prints.  Whatever one thinks of Bernanke, he’s got the U.S. economy humming, despite the doomsayers.  “The economy in the U.S. is going to be steady, so when we look at those trends elsewhere, we feel the dollar should benefit overall,” Wells Fargo & Co. in New York said in a telephone interview.  All the GOP chatter about a double-dip doesn’t match the facts jumping out at nonpartisan U.S. economists.  They see trouble on the horizon for the Eurozone, leaving the dollar strong no matter what actions the U.S. Fed takes.  “We expect the U.S. economy to outperform a lot of Europe . . “ said Sara Yates, a foreign-exchange strategist at London’s Barclays Plc.  All indications are good news for U.S. consumers and the man in the White House.

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