Will The Dollar Continue to Drop?
For most of this year, the US Dollar has had trouble gaining upside traction as key counterparts like the Euro and British Pound have posted new long term highs. For everyday consumers, this has some interesting implications. But these types of trends are not exactly as bad as most regular consumers might think. In fact, a weaker Dollar could create some key positives for the economy and help create jobs in many overlooked sectors (for example in manufacturing).
Assessing Trends in the Dollar
First, it is important to know which gauge to use when assessing the relative strength or weakness in the US Dollar. Of course, strength or weakness in a currency is all relative. A currency can only be strong or weak when compared to its most commonly traded counterparts. This is why most Dollar assessments will typically look at the Euro (and, to a lesser extent, the British Pound), as these are developed market economies that are large in size.
For those that are familiar with the way stock markets work, common instruments to watch trends in all of these assets can be found in ETFs. For the Dollar itself, we can do this by tracking activity in the PowerShares DB US Dollar Index Bullish ETF (UUP). Alternatively, the Pound and Euro can be tracked using the Guggenheim CurrencyShares Euro Trust (FXE) and the Guggenheim CurrencyShares British ETF (FXB). Many regular consumers tend to panic when they hear that the Dollar is dropping in value.
Potential Positives with a Lower Dollar
But this is only a negative for those that purchase imported goods from other countries. If you keep your purchases domestic, the difference is negligible. Additionally, the fact that imports are more expensive can actually be a positive. This is because consumers are almost forced to buy domestic items (because they become cheaper) and this increased purchasing activity actually support the manufacturing outlook for domestic companies. This can be a big driver in creating new jobs.
So there is not so much reason to panic when we start hearing that the Dollar is dropping. This is actually the reason that China does its best to keep the Yuan weak, they want to keep manufacturing cheap goods that are even cheaper because the currency is not allowed to appreciate. The Dollar does not operate under the same rules, but when market valuations head lower, the same positives can be found.
Chart Perspective: EUR/USD
(Chart Source: Orbex)
The chart above might seem overly complicated by the main thing to watch here is the overall trend, and the evidence that suggests the trend might be changing. This chart shows the EUR/USD, which means that rising prices suggest a stronger Euro and a weaker Dollar. For most of this year, the Dollar has been under pressure. The trend lines shown on the chart are starting to break, however, which suggests that an upside change is becoming more likely when we look at the outlook for the Dollar itself.
