Foreign Exchange Rates and a Strong USD

February 1, 2015

While the Eurozone struggles with all sorts of problems, the United States is doing very well. Last Friday we saw the 4th quarter growth in US at a healthy 2.6%. Foreign exchange rates moved accordingly. A strong USD followed.

Foreign Exchange Rates

Clearly, the release is lower than previous quarter 5%. But, there is no reason to panic. At least, not yet.

The moment of truth comes when we get the first quarterly results. We should see the effects of a strong dollar on the foreign exchange rates.

U.S. Exports Influence Foreign Exchange Rates

US exports were lower in the 4th quarter. But, we need to wait for more to see how much the dollar strength hurts exports.

Big US exporters already feel the pain caused by a higher USD. But, in the long-run, their problems only start.

If the FED really plans to hike rates this year, and currently it seems that they will hike, then USD will fly to the moon.

The largest trading partners of the United States are Canada, China, Mexico, European Union, Japan, and Germany. While the FED plans to tighten their monetary policy, Bank of Canada just lowered the rates.

Moreover, Bank of Japan still runs a massive QE (Quantitative Easing) program. And, the European Central Bank will launch its version of QE in the Euro area. You can see how the majority of central banks move in the opposite direction from the FED’s one.

Conclusion

When the FED hikes the rates, the USD will strengthen across the board.

What the FED desperately needs to see is a decent wage growth. However, so far, it didn't happen.

The best bet to keep the US economy expanding is through consumption. But, if salaries stay as they are, or grow very slowly, the strong USD becomes a real problem for the US growth.

Capital Properties FX
February 1st, 2015

Capital Properties FX