The US dollar index, measuring the greenback’s performance against a basket of major trading partners’ currencies, has gained 5% since early February. Against sterling, the dollar recently reached a three-year low. This trend is set to continue.
The key reason is that, while the US economy may not have reached ‘escape velocity’ yet, the latest data clearly shows that it is “crawling out of the mud faster” than its developed counterparts, says Nicholas Pifer of Columbia Management.
Japan is set to ease monetary policy further, which has undermined the yen, while Britain is also expected to move in this direction. Europe is bedevilled by ongoing political uncertainty and recession. This has led to a widening gap between American and European and Japanese bond yields, which in turn bolsters the relative appeal of dollar assets.
There’s also a longer-term argument for the dollar coming into play, says Michael Mackenzie in the FT: energy self-sufficiency. The shale gas revolution should lower energy imports and encourage the shift of some manufacturing back to America, both of which should improve the trade deficit. When it comes to currencies, says Morgan Stanley, America is “the best house in a bad neighbourhood”.