One may be forgiven for thinking that the rising stock market and optimism for a strong job market have led to the US dollar strengthening against most major currencies. For now, the dollar is rising, but for how long?
If the economic recovery and the job gains persist, the dollar is likely to rebound. The Treasury Department and Federal Reserve are ready to continue using monetary stimulus as it becomes apparent that the housing bubble has burst and with it the credit bubbles as well. We should see this effect in American homes as foreclosures increase and home values decline.
This has become the key pillar in which the economy is built upon. Housing prices are driven up because of buyers who hope to get into or stay in a good job. While homeowners are certainly benefitting from lower mortgage rates, they are still paying far more than they used to for comparable homes in the past.
With prices falling for much of the country, homeowners will find this decrease in income a double-edged sword and one which requires some careful balancing of what money they earn from their real estate industry to keep the economy moving along. What is interesting about this economic turmoil is that home prices are still on the rise for those who reside in upper-income brackets. As they try to balance this aspect of their budget, the Fed is likely to continue to use fiscal policy as a means to push up asset prices and inflation.
Despite the fact that the Fed is not raising rates at the moment, they are likely to do so in the coming months as it becomes clear that they have no choice but to raise rates. The only way for this to happen is if inflation accelerates to a level where they are forced to re-evaluate the way they are doing things. This could happen even sooner if the US dollar falls significantly in value.
The euro has also gained in value, so much so that one European bank recently announced that it would buy over a hundred thousand euros in assets. This was done as a way to improve the bank’s credit rating. Many believe that the Bank of England and Eurozone economies are in even worse shape than the US. Since there is very little reason to believe that this is so, it is likely that the euro will continue to climb as investors seek to protect themselves against rising real estate and property prices.
In the negative scenario, the dollar could continue to fall as the inflationary effects become apparent. The federal reserve will begin to use fiscal policy to counter the cost of their efforts to re-inflate the stock market, while those attempting to buy gold or other precious metals will find themselves in a weaker position.
Some estimates suggest that this could save the residential property value by over one-hundred and twenty percent, but investors must realize that this will not remain true forever. Those using funds to protect themselves against inflation will find themselves in the same position and those who enjoy having a diversified portfolio will be in an even worse situation.
So, how long will the dollar bounce off of its recent highs? While it is hard to say, the easiest way to get an idea of how much money is available to buy gold today and how long the dollar may continue to strengthen against gold is to look at the prices of gold bars recently.
Gold is now selling for a record low price relative to the spot price. Although the chart shows that this trend will likely continue, it is possible that prices will bounce back after a long slump. Only time will tell.
It is quite possible that the dollar rebounds after the U.S. economy turns stronger. As the unemployment rate continues to decline, people with financial problems will be encouraged to look for ways to repay their debts as well as find a way to put food on the table for their families.
In the case of inflation, if the Fed decides to raise interest rates, this will affect some foreign nations as well. After all, they have the right to print the currency necessary to buy their own reserves. No matter what happens, the United States will continue to be the reserve currency and although the dollar may be weakening, it will always be one of the most popular investments, especially for those who believe in investing in stocks and bonds.