Inflation Helping US Dollar

Inflation

The countries steadily increasing inflation rates have been helping the strength of the United States dollar. Over the last year the dollar has strengthened compared to the Euro and the Japanese Yen.  This is due to the US consumer prices rising, as well as gasoline prices rising for the first time since June. The dollar has been on a steady increase compared to its rival currencies over the last year. The Federal Reserve has even come out and said that inflation was a major factor in the dollar’s recent rise. Along with the inflation rate, experts measure wage growth to assess the US economies health.

The price of consumer goods is another indication of the strength of the economy. Economists have looked at clothing, accessory and medical commodities as well as vehicle prices to gauge the strength of the US economy. New home sales were also the highest they have been in the last seven years.  With inflation currently helping the US dollar the central banks have taken quite an interest in the inflation rate and when it should raise its interest rate. As of now the interest rates are close to zero. With the US dollar’s recent strength more and more people are looking to invest in American assets.

Most investors are awaiting for the US inflation rate to hit the estimated two percent before they do any serious investing. Once the rate hits the projected two percent this will encourage the banks to increase interest rates on American assets. It will also help to strengthen the US dollar, with higher interest rates which would bring higher returns on any investment made.

The increased rate could potentially be a problem for the country moving forward. The rate of inflation is not taken into account when the government is going over its annual budget. This practice has been the historical norm. Minnesota would appear to have a budget surplus for the year, but this is without taking the inflation rate into account. The projections on the government inflation rate is over one billion dollars. So it would appear that there would be a deficit rather than a surplus.

As the US dollar continues to strengthen the economy will strengthen as well. The US dollar continues to close the gap on the Euro. The Euro continues to fall in value dropping .2 percent in the last day. The Euro was worth $1.0926 on Tuesday after dropping from $1.0947 on late Monday. The inflation rate has been a great help in helping the US dollar strengthen, but one major factor has been the consumer-price index. The consumer-price index measures what Americans are paying for goods and services. Over the last year the consumer-price index for groceries and medical services remained relatively flat, but core prices, excluding energy and volatile food, has risen 1.7 percent. From this data it would appear as though the US dollar is in the best shape it has been in for the last few years. Hopefully this trend will continue.

By James Dixson

Sources:

CBC

WSJ

Star Tribune

Reuters

Photo by: 401(K) 2012 – Flickr License

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