The Dollar Continues To Climb

The American dollar has gotten through its weak stage and currency traders believe the U.S. economy can heal itself. But it’s a risky bet.

The dollar seems to be getting itself together somewhat: after a short period of weakness, the dollar is again rising in value against other currencies. Right now, one Euro will cost you about $1.39, or, the other way around, one dollar is worth about 70 Euro cents. That’s an improvement compared to the beginning of the month, when a Euro cost $1.43 and a dollar was worth slightly less than 70 Euro cents.

A currency is just as strong as the economy it represents – or whatever the currency traders think it’s worth. While it’s true many traders think the United States still faces tough economic times ahead, it’s well known that the average currency trader’s attention span is roughly 30-minutes.

Even as the traders tried to include all the coming weeks in their analyses, they mainly remained optimistic about the fate of the U.S. dollar: decisive political decisions and unimaginably huge economic recovery packages along with some signs of improvement. In Euroland, on the other hand, things don’t appear quite as bright. A few early indicators here point upward, the Sentix index among them, but they are far more timid than in the USA. New stimulus packages aren’t on the horizon; on the contrary: following the Arcandor bankruptcy, politicians are suddenly paying more attention to their regulatory consciences.

The dollar has also been helped by the fact that the outcry for a new global reserve currency has become somewhat more muted. That’s just as well, because no currency can just be ordered to that status by decree. It develops by itself when the underlying conditions are suitable, that is, when the currency area is economically strong enough that its currency is attractive as an investment vehicle.

This weekend, Russia announced once more that its administrative bodies continue to have confidence in the dollar as the reserve currency. It can probably also be safely assumed that there was some arm-twisting behind the scenes to put a halt to the sniping against the greenback. That has relieved the pressure and the dollar can continue its climb although until now, the market forces have been stacked against the dollar and the imbalances have yet to be ironed out. The basic environment and market sentiments also seem to point to a further increase in the dollar’s value.

On the down side, the dollar’s long-term future looks cloudier. The government takes on more and more debt, increasingly intrudes into private industry and the risk of inflation continues to grow. All this, however, doesn’t seem to bother the currency markets. It may be that the traders see the current problems as more serious than any long-term dangers that can be effectively addressed at a later date. But that’s a bet that could turn out to be a bad one.