Dollar will rise against weak euro and pound

The dollar looks like it might be on the way back up after its best performance for three and a half years. But the real reason behind the rise is not that the dollar is strong – it's that the euro and sterling suddenly look even more fragile than the greenback.

"Sentiment has turned 180 degrees," says Commerzbank's Ulrich Leuchtmann of the recent surge in the US currency. Last week the dollar index, which measures its value against a basket of currencies, put in its best performance in more than three and a half years. On Friday alone the greenback recorded its strongest 24-hour rise against the euro since 1999 and had climbed to a six-month high by the start of this week. Meanwhile, the pound tumbled to a 21-month low, close to $1.90. It seems that "following almost six years of straight decline, the greenback is making a vigorous beginning to what may prove a jittery recovery", commented Ian Campbell on Breakingviews.

What's behind the rise? "Talk and numbers," says Campbell. Part of the dollar's turnaround is down to a change of tone from Federal Reserve chairman Ben Bernanke. Having slashed the federal funds interest rate by a total of 3.25% over seven meetings between September 2007 and April this year, the rate has since been held at 2%. However, his recent comment that US inflation is "too high" consumer prices jumped 1.1% in June, the second-highest rise since 1982 raises the prospect of a US rate hike. Then there was encouraging American manufacturing data suggesting the economy may not be in freefall. As Rosemary Righter put it in The Times, "the PMI (Purchasing Managers Index) has held remarkably steady the sector is adding jobs and export orders are healthy". A falling oil price down around 20% from its July peak should also ease input costs.

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