US Dollar - Predicting the Future

The surprising rally of the US Dollar this week has inevitably led to what seems like everyone and their niece predicting just how long it will last. My 10-year old niece doesn’t like the dollar, and though she’s a very bright girl, please note that she based her reasoning on the Canadian dollar looking a lot cooler than its American counterpart. Given that for several years the USD has done little but suffer, it’s of little surprise that few people are giving the greenback a chance.

Predicting the future can be a tricky business, so it’s important to follow some upcoming events that could determine the USD’s long term prospects. Some people throw caution to the winds regarding the future, such as Doc Brown, “Roads? Where were going, we don’t need roads.” In the world of Foreign Exchange, however, should you find yourself without a Flux Capacitor, it is very important to look at these events. They have guided currencies for as long as the market has existed.

In the short term, the upcoming G8 meeting could set the tone for the USD’s future. Should the USD become a focal point at the meetings (as it is expected to), one possible outcome would be a new dedication to strengthen the USD. There is a history of nations working to correct currency weaknesses, such as the Plaza Accord. However, while that agreement was aimed at the US facilitating the recover of the Japanese Yen, the tides have now turned.

Two more reasons for foreign countries to aid the USD are that commodities (such as oil!) are generally priced in dollars, and that the many countries holding dollar reserves would love to see those reserves have higher value. However, the results of the G8 will not be the only piece in shaping the USD’s future. The most important factor rests in the hands of Chairman Bernanke, and whether or not he can walk the walk as much as he has talked the talk regarding interest rate hikes.

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