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What is the future of USD ?


Betting against the USD is no longer a safe option. It has lost its value against many of the global currencies, not only against EURO,YEN but also against the smaller players .
Falling Dollar has created lot of buying opportunities in commodity market, but slight rise in USD has created lot of panic in the financial world few days ago, though to some extent there is also the Chinese factor. 


Why USD was falling?

Federal policy was, printing US Dollars to produce liquidity and there by raise the economic recovery. They really needed that to come out of this economic recession, which started with Sub-Prime market and related events. It is the simple rule, more the supply less the price.This liquidity created big rises in commodity and stock market. On the other hand through QE-2 Fed was indirectly giving moneys to primary dealers to buy Treasuries, which helps to devaluate USD.


What are the results of falling USD?

Falling USD  helps to boost the price of commodities and stock indexes. Because with cheap USD, foreigners invested huge amount  in commodities as they are getting more dollars. But these rise in commodity prices have created another bigger problem, especially for Emerging nations, that is  inflation.  


What are the threats to USD?

There can be many but right now it is, if  investors shift into other currencies that can be a major threat to USD. Now shift can happen in many ways –

1)  When there will be rise in interest rate in other parts of the world, like in Euro-Area, then investors will buy more Euro and sell USD. As many investors are doing that on the expectation of rising rate hike in Euro-Area.

2)  When countries are rebalancing their reserve with EURO and AUD rather than USD. Nowadays this is a growing trend, as many countries are doing that.


Why USD is increasing in recent days?

One of my friend said me that, may be US is under pressure from many countries of the world who are suffering from inflation. But frankly I do not know why US dollar is rising now. May be there is some change in their short-term policy, which is controlling  inflation through reducing the prices of commodities and there by strengthening the USD which indirectly helps to drop in stock indexes.
But it is sure sudden increase in dollar has created lot of problems, as the value of margins have increased and that pushed for some more selling in commodity market. Recently dollar was up from its low point, but I will not consider it a new trend of dollar because I do not see any fundamental changes in US economy. Though today’s data shows that there is less jobless claim  but unemployment number is still high. In this position to prevent unemployment they need to create more jobs in industries. So to create more jobs they need more production and to increase production they need more export. Now export can be more profitable with the cheaper dollar.
So will it be profitable for US to enjoy this rise is USD for long time?   Definitely not, more rise in USD means more lay-off in US economy.


Conclusion

Investor can shift into currencies like EURO for better interest rate but we cannot forget that EURO is very costly now. I told in my past postings that rising EURO is not good for exporting countries like Germany and also for PIGS countries. So I am  not sure about this rate hike in ECB.
Last week financial markets were in fear that US will hit the debt ceiling of $14.3 trillion, and everyone seems to be worried by the fact that if new way (QE-3) does not come then situation can be critical for all.



NOTE :  Please see the disclaimer below this blog.

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