The U.S. Dollar is on the Rise

The American Dollar is competing well against both the Euro and the Yen, indicating that we might be right at the precipice of a robust recovery. This strengthened Dollar is driving much of the increase in stock prices, though it’s also closely tied to an increase in the price of oil. The latter has caused some concern among economists that it might derail the recovery before it really takes hold.

The Dollar’s increased strength comes off the back of a new attitude on the part of the Federal Reserve. Quantitative easing has ended, with no plans for its return. Further, while the strengthened Dollar has been tied to an increased cost of oil, the price of oil futures has declined, indicating that the high price of gas at the pump might be a temporary phenomenon. The Federal Reserve has predicted “moderate” growth in the short term. While this might not be cause for celebration, it is a markedly improved outlook from previous quarterly reports from the Fed. While unemployment remains higher than the Fed would like, joblessness is currently on the decline, with many coming back into the workforce.

The Dollar Against the Yen and Euro

Consider the following objective metrics with regard to the U.S. Dollar: the Dollar is currently trading at an 11-month high against the Yen and a one-month high against the Euro. Two-year Treasury bond yields are up to their highest levels in over seven months. This, when coupled with strong retail sales, is causing investors, particularly in Japan, to hold on to Dollars, rather than spend or sell them. In turn, this will drive the Dollar even further, so long as the traders continue to believe in the recovery of the U.S. economy.

Indeed, the Dollar is up nearly 10 percent since February began against the Yen. Japan is now the country engaged in qualitative easing. The nuclear crisis following 2011’s massive earthquake have caused Japan to become far more reliant upon fossil fuels than ever. This, along with the increasingly strong American economy are driving the Dollar to unprecedented growth against the Yen.

The Fed’s optimism isn’t based on a good feeling. Rather, American banks passed annual stress testing from the Federal Reserve with flying colors. This sent stock markets around the world rallying.

What Does This Mean for Consumers?

At the most basic level, it means that many people who haven’t been consumers in any meaningful sense of the word are going to start spending again. Rather than hoarding money or spending it all on bills, Americans will have greater purchasing power, which means more discretionary spending. This could create a feedback loop where more spending means more jobs, which means more spending. Such a process is precisely what economists have looked for to rebound ailing economies around the world. Historically big consumer spenders, the international manufacturing sector has looked to the United States as the place where the real recovery will take place.

The Perfect Cocktail

The prediction in the short term is for clear skies, though no one knows how all this will play out over the long term. Many economists were waiting for stocks to end their rally a few weeks ago, but these fears were unfounded. Reuters predicted that stock rallies would continue. A strong Dollar, coupled with a healing jobs market and increased consumer spending, is just the cocktail that the United States and world economy needs to get back on track.

Nicholas Pell is a freelance writer based in Hollywood, CA. He loves a strong dollar when traveling abroad.