U.S. Dollar: What Does the Future Hold in Store for the Greenback?

The U.S. Dollar has been on a rollercoaster ride for the past few years and for good reason.  The global economy including our net working capital has been dragged through the most ravenous recession since the Great Depression.  Our global financial infrastructure almost experienced a dreaded meltdown, and economic recovery plans for the developed countries of the world have been anything but lackluster.  Are we on track for more thrills to come?

Where Did The Economic Growth Go?

This decade has not been one noted for economic health except in possibly the developing “BRIC” countries (Brazil, Russia, India and China) where GDP growth has been in the staggering double-digits for some time.  The events surrounding “9/11” started the decline, but our aggressive banking industry put the cap on things that started the recent financial downfall.  Lehman Brothers was made to pay for the sins of the group, but Wall Street bankers are in line to receive bonuses approaching $144 billion this year based on recent reports.  At lease one group in our society had a successful recovery plan in place.

As for the rest of us, the strength of the Dollar, or the lack thereof, will influence our general financial wellbeing in the years ahead.  In order to forecast what is in store for us, a few different perspectives may assist in this attempt at understanding the milieu.

The Dollar’s History

The above 3-year chart presents the Dollar’s history versus a weighted basket of global currencies.  We have reached a low point for 2010, but there are favorable signs.  The 50-week moving average has assumed a path parallel to a line connecting the three lowest points on the chart.  At least the long-term trend seems to appear positive.  Our economy is slowly turning around, and since our economy is the largest in the world, our success must precede others to recovery, a given fundamental basis for support.

Alarm bells, however, have been sounding off for the past two months as the greenback has dropped precipitously.  One did not need a forex account to hear them either.  The Dollar had been beating down the ever-strengthening Euro into submission for the better part of a year and following Gold up its ramp to newer highs.  Unfortunately, both of these trends reversed in early August after a bounce off the crossover of moving averages shown above.  This recent decline has been attributed to the Fed’s announced path for more quantitative easing, as if banks needed more encouragement to lend money.  The fact is that banks are presently hoarding their financial reserves, content to pay out internal bonuses while the economy requires their participation for stimulus support.

The RSI indicator is signaling that a technical correction is almost imminent.  Perhaps, the Dollar will resume a strengthening path in the months ahead, most assuredly after the November elections are behind us.  Employment gains will lead to more disposable income that will create more taxes to pay down deficits, a recipe that will support the observable trend that appears to be forming for the long term.

What about near-term prospects?  The Euro has been on a roll for the past two months, crossing the $1.40 level, a near 20% rise over its recent bottom in the market.  The people at Forecast.org appear to have discounted a portion of the recent strengthening as being temporary in their near-term forecast shown below:

The Euro should predictably peak in relative value in the months ahead, followed by the strengthening suggested by the longer-term perspective discussed in previous paragraphs.  Corroboration from another direction is a “nice-to-have”, but economic recovery must precede this success scenario.

This post was written by...

Robert – who has written 317 posts on The College Investor.

Robert is the founder and editor of The College Investor, a personal finance site dedicated to young adult and college student finances. You can learn more about him here and connect with him on Twitter or Facebook.

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