Some international stock markets are still struggling and foreign currencies are on the decline. It may not sound all that good, but these factors are actually helping the U.S. dollar and its related exchange traded funds (ETFs).
The U.S. economy is expected to do better than other developed economies, and the Fed will be winding down its policy programs sooner than other major economies, which make currency traders lean more toward the dollar, remarks Bryan Rich for Money and Markets. [Fed Hikes Rates.]
Additionally, concerned global investors who fear the ripple effects of a potential debt crisis are pulling out of foreign markets and putting money back into the relative safety of U.S. assets. [Why U.S. Dollar is Looking Up.]
Rich has noted four catalysts for another round of safe-haven demand in dollars:
- Sovereign debt crisis. Confidence wanes in foreign markets as debt problems in a global crisis manifest itself. The flagging confidence started with Dubai and now all eyes are on Greece. Ratings agencies are now warning of downgrades in Portugal, Spain, Italy, Ireland and even France. The outlook for Japan was also downgraded last week. [The Situation in Japan and Greece.]
- Questioning the euro. Uneven performance in Europe will put the viability of the euro currency into question, which is a major plus for the dollar. All sixteen countries in the European Monetary Union have either breached or completely disregarded the Stability and Growth Pact by incurring large deficits. Any implications of a failure or exit of a member country increases speculation of a break-up of the euro.
- Uncertainty in recovery. Countries throwing money at their economies may have been aiding the creation of new bubbles. The Chinese government has started to apply pressure on the country’s banks. Consequently, investors are now fearing a slowdown or maybe even a crisis in China, and people fear that there may be a double-dip recession in global economies. [China Manages Growth.]
- Protectionism. If China’s currency issue gains more attention, protectionist acts may be the likely outcome. The Obama administration has already made its thoughts clear on how free trade may not be applied when countries are trading with nations that pursue mercantilist policies. China retaliated by accusing U.S. of wrongful accusations and pressures over trade policy.
For more information on the U.S. dollar, visit our U.S. dollar category.
- PowerShares DB U.S. Dollar Index Bullish (NYSEArca: UUP)
- PowerShares DB U.S. Dollar Index Bearish (NYSEArca: UDN)
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.