Monetary policy U. S.

Strong U. S. dollar

The U. S. dollar surged to its highest against major currencies since September 2003. The dollar index funds gained about 12% in 2014. Here is a summary of dollar appreciation with respect to some major currencies and gold in 2014.

Euro – 12%

Japanese yen – 13%

Canadian dollar and Australian dollar – 10%

British pound – 6%

Russian ruble – 41%

Chinese yuan – 2.4%

Korea won – 4.7%

Gold – 5%

The strength of the U. S. dollar is as a result of fast economic growth in the U. S. since the second half of 2014. The economic output reached annualized pace 5% in the third quarter 2014, the best stretch since 2003. The economy added 2.7 million jobs in 2014 through November, the best year in job creation since 1999. The claims for jobless benefits dropped to lowest since 2000.

In contrast, the euro zone is close to zero grow, for example German had only 0.1% growth in the latest quarter and Spain is entering another recession. China is slowing down to 7% growth from 7.5%. Growth in Brazil, South Africa, Indian hit head wind of high inflations and foreign capital outflows. Oil and resources dependent nations such as Canada, Australia, Russia, some African and Latin American countries, and Middle East, are suffering from low oil prices and low demand of other resources.

Second, the Federal Reserve has concluded quantitive easing program in October 2014 and is expected to raise interest rate sometime this year. This is in contrast to other major central banks which are conducting or planing monetary easing program. Japanese central bank is expected to do more on monetary stimulus, after two rounds of quantitive easing. The European Central Bank is planning a wide and deep asset purchase program as early as this month. Chinese central bank had cut interest rate by 0.5% last year and is expected to cut bank reserve ratio and interest rate further this year.

Foreign exchange rate, serves as a coupling factor among economic subsystems at national levels. In the global economic system – a large scale dynamic system, one would hope the coupling among national economies to be minimum so that the stability of the large scale system is assured if each subsystem can be maintained stable individually. Unfortunately the globalization has made the coupling so strong that to stabilize economy at national levels, one has to factor in the impact from foreign exchanges. In some extreme scenarios, large swing of foreign exchange rates could alone destabilize an economy.

2015 is very likely to be featured by volatility in currency valuations and the equity market will respond to those volatilities accordingly. This will be exacerbated by the diverse courses of the central banks around the world, political movement such as economic sanctions against Russia, and ultra low oil prices. It would not be very surprising to see another 10% gain in the U. S. dollar through 2015.

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