About five years ago, Martin Feldstein, one of the nation’s top economists and a principal adviser to President Ronald Reagan, predicted that the U.S. dollar would weaken against other major currencies. As reported in the New York Times, this expectation was based on American’s large trade deficit, incredibly low interest rates, modest economic recovery, and predictions that international investors would eventually lose interest in U.S. dollar denominated financial assets.
This prediction was off by approximately one hundred and eighty degrees. The dollar has been rising roughly since Professor Feldstein made his prediction in twenty eleven. There are many explanations. First, while the U.S. economic recovery has indeed been a modest one, America’s economic performance continues to be among the strongest in the world.
That has helped to increase demand for U.S. dollar denominated assets. Second, while America’s central bank, the Federal Reserve, has been tightening monetary supply recently, other central banks are becoming even more accommodative in an effort to stimulate economic growth. Among these are the European Central Bank and the Bank of Japan.
