Despite the significance it holds on the world stage the Dollar had a dismal 2013 in relation to its peers. In fact the world’s largest currency has broadly been in decline since 2001. Although it has rallied since its record low, the US Dollar has failed to recapture its highs. All this could be set to change in 2014 however.
There are a number of key fundamental drivers which could help to see the valuation of the dollar increase. Forex and binary options traders could make significant returns by backing an anticipated rally in the dollar index. Of course for the Index to really surge, a number of key events would need to align to propel the valuation of the greenback higher.
Here we take a look at the some of the key drivers which could make 2014 the year of the dollars resurgence.
Improving US Data
Following austerity measures and the much publicized quantitative easing measures, the health of the economy is looking better. Of course improvements don’t always more in a linear fashion and some data has disappointed. However, broadly speaking the US economy is in relative good health when compared to its peers. Consumption in the economy is increasing and unemployment has been falling. If these bigger trends continue then we could see a recovery gather pace over 2014.
Tapering
The use of quantitative easing flooded the market with dollars in an attempt to stimulate economic recovery. This program of loosening monetary policy has broadly been successful, to the extent that an expectation is now in place for further easing to be reined in. Tapering will of course be a slow and gradual process. However it is far better positioned than most major economics to begin this process.
Interest Rates
Improving growth and a buoyant economy affect the long term Interest rate strategy of Central Banks. While the Federal Reserve may be some way off from making a sudden hike in the Interest rate, an improving economic outlook hints that the US may be in a position to raise rates much sooner that its peers.
Current Account Deficit
A large current account deficit is seen as a country that does not have its finances in shape. Essentially it is one that is living ‘beyond its means’, a fact that is reflected in the weakness of its currency. In the case of the US the trade gap has been shrinking, falling to around 2% of GDP from a peak of 6% in 2005. This bodes well for the dollar going forwards and should help to underpin a change in the fortunes of the dollar.
Europe
We have already mentioned the improved outlook for the US economy in relation to its peers. However this has yet to be reflected in the biggest Forex cross, the EUR/USD. Faced with deteriorating economic fundamentals, the European Central Bank could be forced to implement Quantitative easing measures to stimulate growth just as the US is look to taper its own efforts. This could add further impetus to a dollar revival as funds are quickly switched out of the Euro.
Guest Post by Phil Moore of Binaryoptionsinvestor.net