The American Economy is Recovering from Recession Faster than the Rest of the World

Last week, the strengthening of the American currency continued on the global foreign exchange market, causing the euro exchange rate to fall below the level of 1.40 dollars for the first time in a year.

During this period, the American currency strengthened by 0.9 percent against the euro, bringing the euro exchange rate down to approximately 1.41 dollars. By mid-week, the euro price even dropped below 1.39 dollars, što je njezina najniža razina u godinu dana. The dollar index, which shows the value of the American dollar against six major world currencies, rose by about 0.5 percent last week. At one point, it reached 80.352 DXY, the highest level since September of last year. The dollar also strengthened against the Swiss franc and the British pound, but weakened against the Japanese yen, with its exchange rate falling by 1.1 percent to approximately 107 yen.

The prospects for the dollar’s appreciation against the euro and other important world currencies are increasing as the situation in the American economy stabilizes, while other major economies begin to weaken. Central banks in countries with weakening economies, from the Eurozone and Britain to Australia, may start lowering interest rates, especially as inflationary pressures weaken with falling oil prices. Given that interest rates in the U.S. are at sufficiently low levels, with the Fed’s key rate at 2 percent, no interest rate cuts are expected in the world’s largest economy. Therefore, analysts conclude that the dollar could strengthen in the future against the currencies of those countries that will reduce interest rates.

The unexpected decision by the New Zealand central bank to cut the key interest rate by 0.50 percentage points to 7.50 percent last week, while analysts expected a reduction of 0.25 percentage points, was interpreted on the foreign exchange market as the beginning of a trend of interest rate cuts worldwide. However, the dollar exchange rate occasionally comes under selling pressure due to uncertainty surrounding the situation in the American financial system. Currently, investors are particularly concerned about whether Lehman Brothers, the fourth largest American investment bank, will be able to survive despite massive losses in the mortgage market.

Nevertheless, most analysts expect further strengthening of the dollar. For instance, strategists at Swiss UBS Bank have upgraded their forecasts for the movement of the American currency exchange rate. "We have revised our long-term target price for the dollar upwards because the American economy is likely to recover from recession faster than the rest of the world. We estimate that in the next year, the euro exchange rate will fall to 1.30 dollars," UBS strategists stated in a report to clients. (H)