The US dollar has had a very strong start to the year. Despite many experts forecasting a tough year for the dollar when 2018 got underway, the greenback has seen significant strengthening over the last two or three months as the American economy continues to power ahead.
Its strength could, however, spell trouble for the US economy and indeed the global economy as a whole. Despite President Trump’s attempts to overhaul American trade policy, the economy remains very reliant on consumer spending. In this article, we’ll consider how much further the dollar is likely to grow and whether this could spell bad news for the US economy later in the year.
What Is Driving Growth?
US economic strength has led to the Federal Reserve becoming increasingly bullish about the prospect of further American interest rate rises later in the year.
This has come as stagnating growth and domestic political issues in other countries have caused their currencies to slip. However, the strength of the dollar could eventually undermine the strength of the American economic recovery. President Trump has attempted to narrow the US trade deficit and any significant increase in the value of the greenback could make US exports too expensive in other markets.
Federal Reserve To Change Policy?
So far, there has been little sign that the Federal Reserve plans to deviate from the significant interest rate rises that it has been planning. Its hand could, however, be forced if US inflation rates start to shoot up.
While US wage growth has generally been stronger than other leading economies, it could easily be overtaken by inflation after a relatively small rise. The Federal Reserve will have to balance this against its desire to stop a consumer credit boom fuelled by low interest rates from storing up economic problems for the future.
The US Government, Treasury and the Federal Reserve have difficult decisions to make over the next few months and there is no telling what option they will choose. eventually, their hand may be forced by issues beyond their control but there is little sign of them changing course at this point.