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FT: US Dollar Surging Against Weak Global Backdrop

By John Morgan   |   Monday, 22 Apr 2013 07:46 AM

The U.S. dollar is attempting a comeback, gaining about 4 percent since the start of the year against other major currencies, in a duet with the rise in U.S. stocks.

A variety of factors are pushing the greenback upward, among them improvements in the U.S. economy, eurozone ills and aggressive monetary easing by other developed nations that are deflating their own currencies, according to the Financial Times.

“What’s been happening to the U.S. economy is having a positive impact on the U.S. dollar,” says Joe Manimbo, a senior market analyst at Western Union Business Solutions. “That has not been the case for quite some time.”

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The Times said a rebound in U.S. benchmark interest rates is attracting more foreign investors who want to own dollar-denominated assets that generate higher yields.

As the dollar has risen since the beginning of 2013, the euro, sterling and the Japanese yen have retreated.

Meanwhile, even as the 10-year benchmark Treasury yield has moved closer to 2 percent, the Standard & Poor’s 500 index has recently challenged its all-time high.

Donal O’Mahony, global strategist at Davy Capital Markets, said easing by the Bank of England and Bank of Japan in particular has had a positive impact for the U.S. dollar.

But Christopher Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi, said investors should wait to see how the dollar does against a broader pool of currencies, including those of emerging nations.

“Interest rate differentials can help the dollar only so far,” Rupkey told the Times. “The [Federal Reserve] wants to keep rates low for quite some time, and while the U.S. [gross domestic product] is giving the dollar an advantage over the euro, much of that is predicated on the eurozone economy remaining fairly weak. It’s hard to see the dollar rally going much further once the European economy improves.”

The last two periods of dollar bull runs occurred in the 1980s and again in the 1990s. Both times, the dollar rise occurred while the domestic economy improved and interest rates rose.

According to the Times, the dollar’s outlook through the rest of 2013 may depend largely on whether the Fed continues with its large scale bond-buying program, and for how long.

Since S&P 500 companies derive more than 40 percent of their revenues from outside of the United States, the strength in the U.S. dollar will impact their results, according to Zacks Investment Research.

Technology, materials and industrials companies are expected to be affected the most due to their high foreign exposure, according to Zacks.

Although a strong currency is typically good for a country, it can hurt domestic companies in the short run, the research firm said.

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