The value of the U.S. dollar remains strong against the Euro, the British pound, the Chinese Yuan, and the world.
Over the past year, since the end of January 2018, the U.S. Dollar index (DXY) has risen from just over 89.00 to close at just over 97.00 on Monday.
Yesterday, it took only $1.1278 to acquire one Euro where, last year, it took just over $1.2500 to buy one Euro.
One British pound, last year, cost $1.4264 whereas yesterday one pound cost around $1.2850.
Last year, it took a little less than 6.2700 Chinese Yuan to buy one U.S. dollar. Yesterday, it took close to 6.8000 Yuan to buy a dollar.
We could go further, but these data seem to tell a good part of the story.
One interesting coincidence is that the stock markets in these countries also began to decline while the major stock indices in the United States remained relatively flat.
In retrospect, it seems as if something was going on, something many of us missed until a little later in the year.
At the end of the year 2017, it appeared as if the eurozone, Great Britain, and China were going to experience very strong economic growth for 2018 and beyond. Things had been going well for these countries and most economists saw no reason why these countries could not continue growing into the future.
Early in 2018, a shift began to take place that seems to have been reflected in the performance of the various stock markets. Interestingly enough, investors seemed to buy onto this drop off in future growth expectations early on, whereas others, including the political elite failed to grasp what was happening.
For one, Brexit was brewing in Great Britain and although the political incompetence that revealed itself in 2018 was not apparent early on, there was a growing uncertainty about just where the “leavers” were going and what kind of relationship with the European Union was going to ultimately be.
The uncertainty in England only grew during the year and by the end of the year, economic growth was down to less than one percent. Growth actually was negative between November and December.
But, all of Europe was being impacted by the political uncertainty that had arisen, the election of a “populist” government in Italy, the “yellow vest” protests in France, the changing leadership in Germany. Italy went into a recession in the last half of 2018, and overall growth in the EU was reduced to 1.3 percent.
The quantitative easing of the European Central Bank continued up until the end of the year, but by the end of the year, questions were being raised about whether or not the ECB could actually begin raising its policy rate of interest.
China’s economic situation seemed to deteriorate during the year and by the end of 2018 forecasts for 2019 had been substantially reduced from earlier projections.
Economic growth in the United States remained relatively strong during 2018 with the estimated growth rate for the year coming in at 3.0 percent, substantially above the results coming out of Europe and the declining growth coming out of China.
This allowed the Federal Reserve to continue to raise its policy rates throughout the year, substantially changing the relationship of rates throughout the year.
The U.S. dollar grew stronger because of the economic situation in the world and the role U.S. monetary policy was playing in determining relative interest rates.
This relative economic picture continues into 2019 and beyond. Even though expected growth in the U.S. is for around 2.3 percent now, according to Federal Reserve estimates, this rate of growth is substantially stronger than those coming out of Europe and other parts of the world.
And, even though Fed Chair Jerome Powell and the Fed’s policy making committee have backed off from the strategy it had been following over the past three years in terms of policy rate increases, market sentiment still believes that the Fed may still have another one…or two…further increases in its policy rate of interest before they stop.
Thus, the scenario facing foreign exchange traders is that the economy of the United States will remain stronger than that of Europe, while China’s economic growth will continue to decline.
Bottom line: this seems to be what is driving the foreign exchange market these days. Furthermore, market sentiment seems to believe that this relative economic situation will continue over the near term.
Consequently, the U.S. dollar should maintain its strength in the world markets.
This will especially be the case if a “bad” Brexit takes place. But, the European Union is not getting any stars for its performance these days.
Of course, a strong dollar is not good for U.S. exports and this, along with other trade issues, would have a negative impact on U.S. economic growth.
Furthermore, the strong U.S. dollar is having an impact on oil prices as these concerns about the weak economies in Europe, the United Kingdom, and China, along with uncertainty about the remaining trade talks, are spreading to commodity markets.
We need to continue to keep an eye on the value of the U.S. dollar.
The world is in disequilibrium. We need to keep watching the areas of disequilibrium in order to understand what forces are at work in the world and how these forces might work themselves out.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.