What is fueling a strong rally in US dollar? Top five reasons

NEW DELHI: The strengthening of the USD in recent times has caused some element of volatility in the currency markets across the globe and almost all emerging markets’ currencies have been affected on this score as they have tended to depreciate, CARE rating said in a note.

A stronger dollar, though good for the US economy, would militate at the margin for its exports, though it is still considered to be a domestic driven rather than an external-driven economy unlike some of the East Asian emerging markets.

While the movement of the currency for any country is dependent on the various factors that affect the balance of payments, there is a prima facie reason to believe that some part of the movement can be explained by a stronger dollar, said the CARE report.

The table below gives the rate of change of the currency with respect to the dollar over April '14, after when the dollar started strengthening.

Let’s look at the top five factors which might be responsible for driving up the dollar, as explained by CARE:

A recovering US economy:

The US Federal Reserve has withdrawn the QE completely on the premise that the economy is picking up and that unemployment levels are low and within acceptable limits. This indicates that the economy is going to record a healthy growth rate from 2015 onwards.

Also, interest rates are expected to increase in mid-2015 with the Fed tracking the inflation numbers. This has been interpreted positively by the market. Further, housing prices have witnessed an increase. Lastly, going by the revised 3.9% GDP growth in Q3 against the previous forecast of 3.5% which came over 4.6% in Q2, there is a clear indication of a turnaround in the economy which is likely to be sustained in the coming quarters too.

Easy monetary policies in Japan, China:

Quantitative easing meanwhile continues to be dominating the economies of Japan and the euro region with China is also showing signs of easing rates. Any kind of affirmative action to revive an economy is taken to mean a weak economy and by implication a weak currency. This has propped up the USD which appears to be the strongest currency today.

Changing demand-supply fundamentals:

Flow of dollars in the USA has reduced given that the fiscal deficit is lowered and the Federal Reserve Bank’s quantitative easing programme has come to an end. This has changed the demand-supply dynamics for the dollar, causing it to strengthen.

Countries depreciating currencies:

The nations with lower growth prospects are attempting to depreciate their currencies to prop up exports and hence this has in turn helped the dollar to become stronger.

Hike in US rates attracting investments:

Investors too are looking for investments in countries that are strong and have now tended to move to the US with the expectation of interest rates also going up during 2015.