If you are looking for factors that can determine the US dollar’s short-term outlook, take a look at the current central bank-powered currency devaluations happening in Europe and Japan. While the ECB and Bank of Japan aren’t obviously advertising their monetary policies as conscious devaluation, the effect is the same. Both economies would benefit greatly from the decline of their currencies. Debt would be cheaper to service as well as exports easier to sell due to lower prices. The quantitative easing schemes currently being implemented or soon to be implemented work to devalue both the euro and the yen. This makes the dollar look stronger by comparison despite remaining questions about the strength of the US recovery.
Another key factor that might strengthen the dollar is US Federal Reserve policy regarding interest rates. The Fed is on the record as being worried about the US jobless rate and its impact on the overall economy. If the US’ employment numbers continue to improve, the Fed might be pushed to adjust interest rates upward. This interest rate hike can strengthen the dollar by making US dollar-denominated bonds attractive.
One key factor that might be in play behind any Federal Reserve decision to boost rates is the permanence of America’s historically low labor force participation. If Americans permanently choose to stay in the sidelines instead of getting back in the labor market, labor supplies might get strained and this can force wages to rise. At this point, the Fed can step in and hike interest rates to fight inflationary pressures due to rising wages. Keep your eyes peeled on US interest rates and labor figures.
All told, both the US jobs market’s health and quantitative easing can keep the US dollar strong in the short-term. Of course, this all assumes a big external shock doesn’t happen which ends up knocking the dollar’s value back to earth.