Is The U.S. Dollar Going Up Or Down And Why It Matters

The Course of U.S. Dollar Betrays High Volatility and Contradictions About Inflation

Does anybody know where the U.S. dollar is going? That’s one of the most difficult questions about the economy to answer in 2018. The U.S. dollar index is at a level last seen in October 2015. The EUR/USD exchange rate is at about $1.25. The predictions not too long ago were for the euro and the dollar to achieve parity.

Certainly, that was the trend just before the U.S. election. It was also the trend in October of 2017, when expectations of rising inflation pushed the greenback to the highest point of the past five years, as the dollar index chart below shows. However, as that same chart shows, only a dramatic rise in interest rates can support the dollar’s value. Indeed, the only reason why the dollar started to rebound in late 2015 was because then-Federal Reserve Chair Janet Yellen applied the first (and well publicized) interest rate hike after years of the near-zero interest quantitative easing policy.

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The dollar’s international clout has governments and individual investors confused. Secretary of the Treasury Steven Mnuchin and President Donald Trump delivered completely opposite statements of where they expected–better still, wanted–the dollar to be in the foreseeable future at the recent World Economic Forum in Davos, Switzerland.

High Dollar Vs. Low Dollar: The Truth is the White House Has No Strategy

Mnuchin spoke of the desirability of a low dollar to boost the amount of U.S. exports, even if he believed in the dollar’s long-term strength. Trump contracted him barely 24 hours later, saying he wanted a strong dollar. (Source: “Trump Team at Davos Backs Weaker Dollar, Sharpens Trade War Talk,” Bloomberg, January 24, 2018.)

The hike was a mere quarter of a percentage point, but it sent a clear signal to the markets. In turn, Wall Street welcomed the move, because it suggested confidence in a growing economy capable of withstanding the shift. It was a rare case of raising rates to boost the market.