Analysts at Natixis explained that since March 2018, the dollar has been appreciating against all currencies (particularly the euro and emerging currencies). But the question is; Why is the dollar appreciating? Let’s consider some factors.
25 July, GKFX – The US Dollar Index built on the bullish momentum that it gathered on Monday advanced to a daily high at 94.85 during the early European trading hours. However, can we explain this appreciation of the dollar
Why Is The Dollar Appreciating?
It is definitely due to the fact that US interest rates have risen faster than what was expected beforehand and the fact that the tax reform in the United States has made US equities more attractive;
But it seems incompatible with several developments in the United States:
- The increase in the external deficit caused by the expansionary fiscal policy at full employment;
- The fact that protectionism is negative for the United States, due to the low elasticity of imports in volume terms to their prices;
- The rise in the oil price, which is usually positive for the euro;
- The fact that the effects of the tax reform (repatriation of earnings held abroad) are temporary and not permanent;
- The slowdown in growth in the United States, which could slow down the normalisation of interest rates from 2019.
- So it seems difficult to predict a sharp or enduring appreciation of the dollar.
Conclusion: Hard to believe in a sharp and enduring appreciation of the dollar
The appreciation of the dollar since March 2018 is linked to the rapid rise in interest rates and the tax reform in the United States.
But as a result of:
- The increase in the US external deficit,
- The negative effects of protectionism for the United States,
- The rise in the oil price,
- The fact that the effects of the tax reform are temporary,
- The slowdown in growth in the United States.
It is hard to believe that this appreciation of the dollar can be enduring or significant.
This article Why is the dollar appreciating? was written by analysts at GKFX. The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice.
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