Has The US Dollar Topped Out, Or Headed Much Higher? by Gary D. Halbert


by Gary D. Halbert

April 21, 2015


  1. US Dollar Has Risen Over 20% in the Last Year
  2. The Really Bullish Case For the US Dollar
  3. Surging Dollar Boosts Europe, Japan & Others
  4. Who Pays Income Taxes in America & Who Doesn’t
  5. How Government Disguises the Real Level of Taxes


The US dollar’s value has been on a tear since last summer, with the greenback’s value surging more than 20% against a basket of major foreign currencies. Reasons for the dollar’s sudden strong advance vary widely, but include the following among others:

  1. The US economy is faring better than most other developed economies, and foreign investors have to buy dollars in order to participate.
  2. The Fed is expected to raise short-term interest rates this year, and higher rates historically lead to a stronger currency.
  3. US stocks and bonds have been the leaders in market returns in recent years, and foreign investors continue to flock to them, creating more demand for dollars.
  4. Global tensions and concerns are rising in many parts of the world, and foreign investors are seeking a safe-haven in which to park their money.
  5. Basically, the US is the least worst of a bad lot when it comes to where international investors want to stash their money.

For these reasons and others, international capital has been flowing into the US at a near-record rate since last summer. This has definitely boosted the value of the US dollar since last July and may continue to do so. But questions remain.

The first question is whether the strong rise in the US dollar will continue? There are some compelling arguments that it will, as I will discuss below. Yet in March of this year, the US dollar turned lower. So the next question is, whether the recent downturn in the US dollar is a real change of trend? I’ll offer an opinion as we go along.

Following that discussion, we will delve into the latest data on who pays income taxes and who doesn’t. The numbers may surprise you, especially given that the Democrats want to raise income taxes on high income earners and corporations. What else is new?

US Dollar Has Risen Over 20% in the Last Year

A country’s currency is, in part, a reflection of how well or poorly its economy is doing. And, for the moment, the US is setting the pace for most of the developed world. US gross domestic product surged at a 5% annual rate from July through September, the fastest pace in more than a decade. As the recovery picked up speed in the 2Q and 3Q of last year, American employers added nearly 3 million jobs to their payrolls, the biggest gain in 15 years.

Investors around the world looking for a piece of that growth have to use dollars to buy into it. And that demand for dollar-based investments drives up the price. In the second half of last year, the dollar rose more than 16% against a collection of world currencies.

Let’s start with a chart of how much the US dollar has risen in the last year alone. The rise has been very impressive, especially in light of how much our national debt continues to rise – now above $18 trillion – the largest in American history. Let’s take a look.

US Dollar

Bloomberg’s Dollar Spot Index, which tracks the US currency against 10 major peers including the euro and yen, has surged 20% since the middle of 2014. The gains stalled recently, sending the Index down more than 3% in the three weeks through April 3, as Fed officials tempered investors’ expectations about the pace of interest rate increases.

Yet as you can see above, the dollar has rebounded in the last two weeks, and some analysts believe it will move significantly higher before this trend is over.

The Really Bullish Case For the US Dollar

US dollar bulls argue that there’s pent-up demand for the US currency that will lead to years of appreciation because the world is “structurally short” the dollar, so says former International Monetary Fund economist Stephen Jen and others.

Sovereign governments and corporate borrowers outside America owe a record $9 trillion in the US currency, much of which will need repaying in coming years, according to data from the Bank for International Settlements (BIS). That’s up from $6 trillion at the end of 2008.

In addition, many foreign central banks that had reduced their holdings of the greenback in recent years are starting to reverse course, creating more demand. The dollar’s share of global foreign reserves shrank to a low of 60% in 2011 from 73% a decade earlier, although it has since climbed back to 63%.

While there will continue to be short-term ups and downs caused by changes in Fed policy, interest rates and economic data releases, the major trend may well remain higher due to these larger forces combining to fuel more appreciation, so Mr. Jen believes. He adds:

“Short-covering will continue to power the dollar higher. The dollar’s strength is not just about cyclical factors such as growth. The recent consolidation will likely prove to be temporary.”

Jen predicts that the dollar will climb another 9% over the next several months, and maybe more if the Fed hikes its short-term interest rate, which I don’t expect until September at the earliest. Of course, there are still some who believe the FOMC will raise the Fed Funds rate at the June policy meeting. Should that happen, I would expect the dollar to move to new highs, if it hasn’t already done so.

Jen isn’t the only one who thinks short-dollar positions will cause the rally to extend. Chris Turner, head of foreign-exchange strategy at ING, sees the dollar surging through parity with the euro by mid-year. He said gains will be spurred by bonds from Germany to Ireland that are yielding below zero.

“Central banks are re-accumulating their dollar reserves and low, or negative, bond yields in the euro zone will probably speed up that trend,” said London-based Turner, whose bank topped Bloomberg’s rankings for the most accurate currency forecasts in the past two quarters.

Surging Dollar Boosts Europe, Japan & Others

The International Monetary Fund (IMF) revised its forecasts for global growth in 2015 and 2016 last Tuesday, considering among other things the recent strength in the US dollar and weakness in other currencies. While the IMF downgraded its estimate of US growth modestly, it actually revised upward its forecasts for most of Europe, Japan and some other countries whose currencies have weakened against the US dollar. Let’s look at the latest numbers.

The IMF left its projection for global growth in 2015 unchanged from three months ago at 3.5%. Underneath the stable forecast, however, the IMF depicts a global economy being reshaped by swings in currency markets and the drop in oil prices.

The Washington-based lender of last resort cut its US expansion forecast by 0.5% to 3.1%, still the fastest among the most developed major economies. The Japan growth outlook increased to 1% from 0.6% in January. The euro area is projected to expand 1.5% from 1.0% earlier this year as weakening currencies provide a “welcome boost,” the IMF

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