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Is The Dollar Too Powerful?

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August 26
9:26 AM 2019

The American economy has remained strong despite an ongoing trade war, yet many analysts are worried about a forthcoming recession and now openly speak about trouble on the horizon. Many economists and financial professionals are particularly worried about the American dollar, which has remained robust in recent years - too robust, some say.

Is it possible that the dollar is too powerful? What are the economic consequences of such a vibrant currency? Here's what experts are saying about the dollar, and how its strength may be put to the test in the near-future.

The dollar has endured despite strong headwinds

There are plenty of reasons to believe that the U.S. dollar may have suffered in recent years; after all, a tumultuous trade war and a series of unexpected political developments have upset marketplaces all over the world. Nevertheless, the dollar has remained incredibly strong in recent years despite the strong headwinds against it. Take a glance at a historical chart of its value and its easy to see that the dollar has consistently been increasing in value since the worst effects of the Great Recession died away. 

What's causing the dollar to remain so strong? A number of things determine the overall strength of a currency. One of the reasons that the dollar has remained so vibrant is that foreign currencies have been devalued on purpose in an effort to make them more appealing to some investors. Both China and the European Union have been accused of altering their currencies to better compete against the greenback, for instance, with President Trump having recently taken drastic steps to label China a currency manipulator as a result of their actions. Many financial experts are arguing against the recent decision, however, and the dollar isn't solely valued based on how it competes with foreign currencies. 

The Federal Reserve can impact how valuable the dollar is, for instance, proving that foreign actors aren't the only ones who should be considered when assessing how the currency derives its value. By raising interest rates, the Federal Reserve can strengthen the dollar, as treasury notes purchased from the Federal Reserve would attract higher interest rates in the short term and thus be more lucrative to investors who pick them up. Future changes to intertest rates will doubtlessly impact how the dollar is valued and traded on EagleFX, and the president has made it clear he wants rates to be cut in the near-future in order to boost growth across the U.S. economy. 

Foreign developments can and do have a serious impact on the dollar, however, so it's important to consider both domestic and international factors when appraising its value. Tumult in the European Union over Britain's forthcoming departure from that political body could diminish the value of their currency, for instance, which would likely bolster the dollar at least in the short term. 

The president wants to weaken the dollar

It may seem confusing, but President Trump has made it clear that he wants a weaker dollar. This is because a weaker U.S. dollar renders American goods more affordable in the eyes of foreign customers; if the U.S. dollar isn't particularly strong, foreign companies can afford to purchase more American goods (which are sold in exchange for now-cheaper-to-acquire dollars), which could technically bolster the wellbeing of domestic manufacturers. Given that he was elected on a promise to revitalize forgotten economic areas, a weak dollar could help the president out politically ahead of the 2020 election.

Other domestic actors will resist him, however, and the market always has a mind of its own. The U.S. dollar is too powerful in the eyes of the president, but whether or not he successfully weakens it remains to be seen. 

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