It's no surprise that the dollar is getting stronger. However, is that really a good thing? If you look at it on a larger scale, there is no simple answer to that question.
If you compare the dollar against other currencies on a global trade-weighted basis, it has strengthened approximately 20% - 25% in 2016. Weeks after Trump's victory, the dollar experienced its sharpest rise. When compared to the 2011 low, the dollar is already 40% up from that point.
However, a lot of experts are saying that the dollar is getting overvalued. In fact, the majority of the professional investors are saying that the US dollar is the "most crowded trade.”
The USD Rally
One of the biggest reasons why the dollar is in a rally is because of Trump's administration. Most professional investors are betting that changes in the economic policies will further increase the dollar's value.
Trump's administration is all about increased infrastructure, fiscal stimulus, and tax cuts. As a result, the Federal Reserve is increasing the fed funds rate. When the Federal Reserve does such a thing, it's usually to stimulate the dollar's appreciation and reduce the inflationary pressure. The Trump administration is also big on policies that center around the restriction of free trade and repatriation of profits, which also boosts the dollar's value.
On the other hand, central banks from around the world are adopting strategies that work towards accommodative monetary policies and quantitative easing. This is particularly the case for Bank of Japan and European Central Bank. These countries are printing money to help fuel the local economic. On the downside, printing money will mostly lead to the currency’s devaluation.
This further weakening of other currencies further increases the dollar's strength.
So What's The Problem?
Like all things in life, there's a bad that comes with the good. A strong dollar means it's easier for Americans to buy imports. A strengthening of the dollar is also a good thing as it promotes faith among investors who do business in the United States.
On the other hand, American companies that do a lot of exports are getting hurt. This is just how international money flows. Whenever a currency is getting stronger, the country's imports get stronger, and exports get weaker. This is a recipe for a widening trade deficit, which is definitely a bad thing.
As the dollar increases, other countries will find it expensive to purchase products produced in the United States. For American exporting companies, profits will reduce, and it would be tough for such companies to compete in the global arena. Even Trump's administration realizes this. According to Trump in an interview, he claimed that the strong U.S. dollar is "killing us."
So Who Is Right?
As of the moment, Wall Street analysts are still in the heated debate on who's right. According to Dubravko Lakos-Bujas, a JPMorgan US equity strategist, the strengthening of the dollar is the greatest risk to the global economy in 2017. On the other side of the opinion is the US Treasury Secretary. According to Steven Mnuchin, the short-term effects may be negative, but the long-term gains can offset the bad.
