Why hasn’t the dollar prospered?

While the pound has been forging ahead, the US dollar remains weak. The dollar index is hovering below the 80 mark, having been as high as nearly 85 in mid-2013. Many factors suggest it should be rising more strongly, and certainly this is what many investors were expecting at the start of 2014.

First and foremost, the Federal Reserve is not creating as much fresh money to buy bonds as it once was – and it seems set to continue this ‘tapering’ of its quantitative easing (QE) programme.

The gradual winding down of QE has also led to expectations that US interest rates will eventually go up, which should in theory boost the value of the dollar. Then there’s all the political unrest in the Ukraine, which should have boosted the dollar’s safe-haven status.

So why hasn’t the greenback fared as well as expected? The main concern seems to be that the US economic recovery will be weaker than expected this year.

Others also argue that the US stock market has become too dependent on cheap money and that higher rates or an end to QE might cause it to crash. If so, then the Fed might have to halt or reverse the taper, which would point to a weaker dollar.

Traders seem to have had enough of being on the wrong side of the trade – Reuters reports that at the end of last week, speculators turned net short against the dollar for the first time in six months – in other words, the majority are now betting its value will continue to fall.

Of course, experience shows that when investors turn bearish on an asset, that’s often when it starts to recover.

Merryn

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