The U.S. dollar is on fire once again, with the dollar index rising to a 16-month high against the basket of other currencies. The surge was driven by the political malaise in Europe, especially growing uncertainty over a smooth Brexit deal and concerns over Italy’s budget that has led to the decline in euro and sterling.
The appreciation in the greenback is further supported by the Federal Reserve’s latest FOMC meeting as well as an upbeat economy. The central bank reaffirmed its plan to raise interest rates for the fourth time this year as soon as next month and a potential for two more hikes by mid-2019. Meanwhile, the American economy looks exceptionally solid with robust job creation, strong GDP growth, a 50-year low unemployment rate, fastest pace of wage gains in nearly a decade, and rising consumer and business confidence.
On the other hand, a weakening Eurozone economy will continue to trigger euro-selling pressure going into the year-end. Additionally, a persistent slowdown in the Chinese economy due to the trade war between Washington and Beijing is compelling investors to flee to the safer greenback.
Against such a backdrop, the bullish trend in the dollar is likely to continue through the end of the year.
Strong Dollar: Boon & Bane
A strong dollar will lead to a rally in the stock market as it attracts foreign money from investors seeking dollar-denominated returns instead of their home currencies. Additionally, energy cost in America decreases with a strong dollar, thereby lowering the industrial cost and increasing the profitability and propelling the overall economy.
While a strong dollar provides an edge to the domestic-focused companies, it makes dollar-denominated assets expensive for foreign investors, making U.S. multinational products uncompetitive, leading to lower demand and less profits. As such, companies having a higher percentage of international sales will likely underperform in a rising dollar environment. Moreover, commodities, emerging markets, and gold mining stocks also get hurt by a strong dollar.
