As many of you know, the value of the U.S. dollar, compared to a basket of other major world currencies, fell sharply during the past five months in response to traders’ expectations that the Federal Reserve would begin a second wave of quantitative easing.
Although many financial pundits expect the exchange-value of the dollar to continue to decline during the months ahead, my research suggests that just the opposite will occur – that the dollar will stabilize during the next few days and then turn higher during the coming months.
That’s because most currency traders have likely factored the majority, if not all, of the variables that could negatively affect the exchange-value of the dollar during the coming months into their trading decisions. Those same traders also have likely begun to consider some of the variables that might positively affect the exchange-value of the dollar during the months ahead.
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For example, currency traders are well aware of the amount of U.S. government securities that the Federal Reserve might purchase during the coming months, with the Fed stating on Nov. 3 that it plans to purchase up to $600 billion of longer-term U.S. Treasury securities between now and June 2011 and that it plans to reinvest principal payments from its current holdings of Treasury securities.
Some of those same traders have probably considered the possibility that the Fed will likely purchase a smaller amount of Treasury securities than the amounts mentioned above in the event that economic conditions in the United States were to improve considerably during the coming months and that the pace of economic growth were to increase at faster rates during the next couple of quarters than it did during the past two quarters.
Any such decision, if it were to occur, would positively affect the exchange-value of the dollar. (By the way, an abundance of economic statistics indicates that economic conditions in the United States will improve considerably during 2011 and that the U.S. economy will grow at a faster pace during the first two quarters of next year than it did during the past two quarters.)
Meanwhile, many countries around the globe whose economies rely heavily on exports to the United States have an inherent interest in supporting the exchange-value of the U.S. dollar.
That’s because the higher the value of the dollar is, in relation to the value of their currencies, the less expensive their goods are for Americans to purchase. Hence, their exports to the U.S. tend to rise when the exchange-value of the U.S. dollar rises.
That’s one of the reasons why countries such as China and Japan, as well as numerous other foreign countries, purchased large quantities of U.S. government securities during the past couple of months. (When foreign investors purchase U.S. securities they must exchange their currencies for U.S. dollars – they must buy dollars. Hence, whenever the demand for the dollar rises, via foreign purchases of dollars, the exchange-value of the dollar rises.)
The fact that the U.S. dollar index fell last week to a major price-support level of around $75 and that it bounced off that level on Friday and continued to rise this morning seems to support to my forecast.
Note from Moneynews:
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