Wall Street and the rest of the world seem to be unanimous in counting on a stronger U.S. dollar this year — and it's been clear sailing so far, as the American economy strengthens and other developed nations weaken.
But Barry Eichengreen, an economics professor at the University of California, Berkeley, would not advise betting on it.
In an article for
Project Syndicate, he noted many investors have placed very large bets on the dollar, which is already at multi-year highs against the euro and some other major currencies as the U.S. economy powers ahead.
"The other major economies, by contrast, are stagnant, slowing or both. Europe's economy is dead in the water, and the dreaded specter of deflation is looming ever larger," Eichengreen wrote.
"Because policymakers are out of options, there remains little doubt that the European Central Bank will pursue quantitative easing. . . . European officials will welcome a weaker euro, which will improve competitiveness, at least modestly," he wrote.
Eichengreen noted the major Asian economies, led by Japan and China, are likewise sputtering, which should also spur dollar appreciation, and that some emerging markets are faring even worse.
So what could go wrong for the new crowning of King Dollar?
"A first reason to doubt projections of a stronger dollar is that none of the news on which they are based is really news. The expectation of relatively strong U.S. growth is already being reflected in the markets, with the dollar up 9 percent in trade-weighted terms since mid-2014."
Eichengreen suggested the strength of the dollar is already priced into currency markets, meaning anything less than stellar U.S. economic growth might throw a wrench in expectations.
"The second risk is that, even based on current growth expectations, investors may have gotten ahead of themselves in anticipating monetary-policy tightening."
But he said labor force data could upset that apple cart, especially if the labor force participation rate begins to rise. "If it does, the unemployment rate may stop falling, and upward pressure on wages would be limited. The Fed would then delay tightening for longer than anticipated," he predicted.
Finally, Eichengreen said unexpected financial problems could interrupt U.S. growth and force the Fed not to play its rate tightening card. For example, he said the collapse in oil prices, if it persists, could force energy producing countries like Russia to sell their dollar reserves to prop up their currencies.
"Such developments would cause U.S. debt yields to spike, disrupting growth. The dollar would become weaker, leaving investors wrong-footed. The dislocations could be severe," he predicted.
CNNMoney took a more optimistic view of the dollar, noting Goldman Sachs predicts the dollar and the euro might reach parity by the end of 2015 — a far cry from as recently as 2008, when a single euro was worth $1.60.
"Now the European Central Bank is poised to launch a new stimulus program. While that program could boost the economy, it's also likely to depress the euro's value further, at least initially," CNNMoney reported.
"That said, the stronger dollar isn't great news for big multinational companies like General Electric that do lots of business overseas. These corporate giants get shafted when they exchange revenue earned abroad back into dollars."
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