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Why the Dollar Could Take a Breather

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Apr. 29 2015, Published 1:16 p.m. ET

A stalling dollar

Finally, softer U.S. growth, particularly in the context of unexpectedly strong growth from Europe (IEV), may cause at least a temporary stall in the dollar rally. The silver lining is that while a soft economy will not be great for domestic sales, it would give U.S. exporters a bit of breathing room.

the dollar could take a breather

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Market Realist – The dollar could take a breather if the economy remains weak.

The graph above shows the movement of the dollar index since July 2014. The dollar index indicates the strength or weakness of the US dollar (UUP) relative to other major currencies. Since July 2014, the index galloped from 79.8 to 96.4—a gain of 20.8%. The dollar has largely seen one-way traffic against most major currencies. However, the dollar stabilized in the last month or so due to poor economic data. However, currencies tend to revert to the mean.

While the Fed ended its bond buying program in October 2014, other central banks—mainly in major developed markets (EFA) (VEA)—are still in monetary easing mode in order to revive growth in their respective economies. The ECB (European Central Bank) and the BoJ (Bank of Japan) are both pumping liquidity though QE (quantitative easing). China was the latest economy to join the easing bandwagon. The People’s Bank of China lowered the reserve requirement ratio for all of the banks by 100 basis points to 18.5%.

This divergence in policies caused a stronger dollar in the past eight months or so. However, as the recent CFNAI (Chicago Fed National Activity Index) figures suggest, the economy may grow as fast as some people think. This could cause the dollar rally to stall—this could actually be a blessing. It could give exporters and large-cap companies (OEF) much needed relief.

Read Labor Market Recovery: The Missing Ingredient for more on why the economy could stay weaker than expected.

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