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Sunday, May 16, 2010

Macro analysis on the US Dollar value - May, 2010

The current uptrend of the Dollar made many people talk about the possible failure of the EU zone, the parity between the Euro and the US Dollar and even brought ideas of Euro disappearing as a common European currency.
Let's see some figures.
The Trade balance of USA for the last 3 years (since the crisis began) shows that the periods of US Dollar gaining value are accompanied by decreases in the country's import and export of goods and services.

Plot this into the current Forex market conditions and the macro economic data from USA. Consider the following table of quarterly US GDP and EUR/USD (Euro/Dollar) graph (click on the graph for a better view).

Table 1 - USA GDP
14Net exports of goods and services2009 I  2009 II  2009 III  2009 IV  2010 I 
15   Exports-29.9-4.117.822.85.8
16      Goods-36.9-6.324.634.16.7
17      Services-
18   Imports-36.4-14.721.315.88.9
19      Goods-41.0-16.525.120.39.0
20      Services-11.5-7.57.0-1.98.7

EUR/USD graph

The US Dollar for the last 5 months got near its highest levels since the start of the crisis and for the first quarter of 2010 the USA trade balance from the GDP table shows a lesser increase than the one marked for the previous quarter (in which the US Dollar was near its lowest level since the crisis start). Following this logic, the second quarter could prove identical or worse results.
An interesting conclusion from this comparison is that even with the higher value of the dollar the US economy was not able to achieve a higher growth of the money inflow to the country from foreign trade compared to the last quarter. So generally a weaker Dollar works better for the export/import businesses. Especially in a situation where the domestic consumption is not as strong as desirable.

Surely the strong Dollar is not the only obstacle in front of the USA sustainable growth. But in the current US economic policy of "easy money" it doesn't seem to please anyone but maybe the big petroleum companies which could have gained from both the increase of crude oil price and the increase of the Dollar value.

The current policy of FED has proved to be actively in favor of using monetary measures to expand consumer spending. There are no signs it will be changed in the near future. Basically this means pouring more money in order to stimulate spending relying mostly on the Keynes multiplier.

With all that said the current stock market and Forex market situation seems perfectly fit. A possible direction would be an increase of the available US Dollars on the market which will achieve two goals - stimulate (even if considered as being an artificial stimulation) domestic spending and bringing down the US Dollar value against the Euro (which happens to be the major currency it values against). The lesser value of the US Dollar would again increase the activities in foreign trades area and in turn would increase its share in the US GDP. As most of the major companies traded on the US stock exchanges are doing an international business this would reflect in possible increase of their financial results.

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