Why the U.S. Dollar is Rising – And Why It's Still Doomed

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Note: This article was updated August 20, 2013.

Many have wondered – and rightly so – why the U.S. dollar is rising even though the U.S. Federal Reserve has done just about everything possible to debase the currency over the past five years.

Over the past two years, the U.S. Dollar index, which measures the dollar against a basket of major world currencies, is up by more than 10%.

Part of the answer is that most of the world's other central banks have pursued easy money policies similar to the Fed's. In the so-called "currency wars," the U.S. dollar has one major built-in advantage.

"The U.S. has never defaulted," explained Money Morning Chief Investment Strategist Keith Fitz-Gerald. "The world may hate our guts, but when all hell breaks loose, they all love our dollar."

Also helping to explain why the U.S. dollar is rising is that it remains the world's reserve currency – the money a majority of nations use to buy commodities such as oil — and that the U.S. economy, for all its warts, is in better shape than most of the other developed economies in the world.

"The dollar is the best-looking horse in the glue factory," Fitz-Gerald said.

So it wasn't too surprising that when the Fed started hinting back in June that it might start "tapering" its quantitative easing (bond-buying) policies later this year, the U.S. Dollar index spiked 3.1%.

Any further talk from the Fed about its plans for tapering – a very likely possibility — could further boost the dollar.

But Fitz-Gerald said that investors still need to be wary of the stronger U.S. dollar going forward.

"It doesn't mean the risks have gone away," he said. "The Fed has added trillions to its balance sheet. The economic recovery is not strong enough. Debt is out of control at every level – government debt, personal debt, corporate debt."

Why The U.S. Dollar Is Rising And Why That's Bad

To get an idea of the true state of the U.S. dollar, it helps to look beyond its recent strength.

Join the conversation. Click here to jump to comments…

  1. H. Craig Bradley | July 5, 2013

    JUST "LET IT HAPPEN"

    If in the future we have widespread bank failures and a stock market crash, then we face another depression (Great or Minor). Bank failures are deflationary because they destroy capital (savings). The FDIC won't be good for it, so ending badly means the end of the global financial system and the U.S. Dollar's leading role in it. All the leading players, including everyday Americans with any financial assets that is, will be drastically altered (reduced). Those with nothing won't be affected much. Hard to lose if you already have.

    The political costs for those in office in 2007-2009 of just "letting it happen" are precisely why central bankers did not allow it to happen (bank failures). Instead, president George W. Bush invented the "too big to fail" policy. Obama merely continued on thoughtlessly. Americans were happy to just follow their leaders. So, what are the chances of the systems participants just letting it happen in the future? Zero (nada) because they are fully invested and committed to the old system.

    • RePete | July 8, 2013

      But what happens if things get so bad, the confidence of people is lost and they will demand much higher returns for treasuries. At that point, the Fed is powerless. Bond market meltdown, stock market slide. This is a very dangerous game that the Fed and all central banks are playing with their QE programs. The next meltdown will probably mean that the world will give up on the Dollar as the worlds reserve currency (actually, it's only 70% of the worlds reserve currency.) Then watch oil prices spike in the USA. The good news, at least jobs will come back to America with the new low wage slave state, and after losing everything we ever worked for, we can all start over again in the "new equilibrium", as Andrew Mellon suggested in 1930. The only winners in that scenario are the ones with cash.

  2. Daniel McNally | July 7, 2013

    Beowulf was the the hero!

    • David Zeiler | July 8, 2013

      Absolutely correct, Daniel. We were thinking of Grendel, of course (or his mom). My college English professors would be appalled!

  3. Ashwani Gaat | August 27, 2013

    The biggest reason i found due to this drastic change is the faulty currency notes flowing in India,….Everyday we heard about crores of faulty notes are being caught by police….
    This decreases the value of rupee …
    I am also posting on this topic…

  4. sriram vangipuram | August 28, 2013

    firstly to increase the rate of our Indian rupee we have to get all black money from the useless people in India then we feel more better because as my research is concerned we have some lakhs of crores of rupees in India which are not in the statistics.It is more pitiable than the decrease of rupee over dollar.

    • manyuman | September 5, 2013

      I fully endorse your view. Get back the illegal money stacked abroad( it's our tax payer's money). It will alleviate the economy to a great extent.

  5. Joseph | August 29, 2013

    Im interested to learn more about money morning

  6. Chester Miao | September 17, 2013

    From China

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