Prospects for the US Dollar in 2014

Online, June 4, 2014 (Newswire.com) - The American stock market has been riding high recently and much of this rise has been fuelled by the Federal Reserve's quantitative easing programme. This provision of created money was initially used to prop up ailing banks in the wake of the 2008 financial crisis. But in recent years it has been used to purchase financial assets, particularly government bonds. This has allowed the American government to continue spending at a high rate, with the theory that this will stimulate economic growth.

But such creation of money cannot go on forever and now the Federal Reserve is tapering its quantitative easing. At the end of last year, they tapered bond purchases by $10 billion a month, reducing spend to $75 billion. Since then, there had been three additional reductions in the programme which currently is at $45 billion per month. The new Fed chairman, Janet Yellen, expects the QE program to be wound down throughout 2014 and be concluded by the end of the year.

This complete tapering off created money into the system is dependent on the Federal reserve considering the economy to be healthy. One consequence of the reduction in supply of easy money is a reduction in stock purchases by financial institutions and a restriction on government spending?

This has brought about concerns in the financial markets over the value of the dollar. Buyers of the currency are worried that without quantitative easing, the dollar will weaken as activity in economy reduces. Investors are also concerned that the many billions of computer-generated funds infused into the American economy in recent years will eventually dilute the value of dollars in circulation. That inflation has been subdued is indicative that this liquidity hasn't found its way to the general consumer.

It remains within banks to keep capital high and in purchased bonds, not in the hands of the ordinary consumer on the street. But that could change and with it the real value of the dollar as against gold and other hard currencies.

How much the dollar might fall the next year or so, is of course hard to say, or whether it will fall at all. There was a decline against some major currencies at the end of last year and into the beginning of 2014, particularly against the British pound which reached a five-year high against the dollar in April. But a bit of a rally recently, which may continue if the tapering off the QE programme concludes successfully.

But there is still the weight of the many billions already created which haven't found the way into the wider economy yet. And the concern that the federal government will be unable to finance itself without the support of this program. Good growth in many countries of the world, which are trading partners of America, is providing a favourable backdrop to this process, and the shale oil boom is doing wonders for the balance of payments, but the jury is still out on whether the Federal Reserve will escape paying for the QE programme by high inflation and a falling dollar.

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