The return of the dollar

“In the last four months alone, it [the US dollar] has soared by more than 7%” - By Mohamed A, El-Erian, Chief Economic Adviser, Allianz

Below summary by Anthony O'Brien

The US dollar is on the move and two factors are working in its favour, particularly when compared to the euro and the yen.

First, the United States is consistently outperforming Europe and Japan in terms of economic growth and dynamism – and will likely continue to do so.

Second, after a period of alignment, the monetary policies of these three large and systemically important economies are diverging, taking the world economy from a multi-speed trajectory to a multi-track one. Indeed, whereas the US Federal Reserve terminated its large-scale securities purchases, known as “quantitative easing” (QE), last month, the Bank of Japan and the European Central Bank recently announced the expansion of their monetary-stimulus programs.

Yet the benefits of the dollar’s rally are far from guaranteed. While the US economy is more resilient than Japan and the Europe, sudden large currency moves tend to translate into financial-market instability.

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