The rising dollar is based on a number of good reasons. For example, the American economy is growing significantly faster than those of the EU.
In the past quarter, the economy of the United States grew by 4.6 percent, while the European economy only grew by 0.1 percent. The entire 2014 estimation for the United States of 2 percent is also considerably higher than the 0.9 percent for Europe.
Partly due to this growth the United States with its monetary policy is in a different stage of the economic cycle than Europe is. While the American system of central banks, the Fed has almost phased out its large QE program, the European Central Bank is just on the eve of a period of major expansion.
Finally, the American trade deficit decreases rapidly due to the large-scale production of shale gas and oil. US energy imports decrease hard. Partly due to that the world is decreasingly flooded with dollars.
Putting this all together makes a powerful cocktail for a further rise in the dollar against the euro. In broader perspective, this means that better times are heading for European businesses and investors in dollar-sensitive businesses. Where European companies earlier this year constantly complained because of the expensive euro and declining competitiveness, the situation appears to slowly improve.
The dollar increase will eventually stop. Because at some point in the United States such an expensive dollar will pinch. Quite a few large American multinationals sell a large part of their products and services in the rest of the world. A large part of it is in the European market. The competition from their European counterparts intensifies because of the cheap euro.
How long will the American monetary authorities continue to accept this dollar increase? For now they will though Janet Yellen recently announced that the strengthening of the dollar began to give birth to her concerns.
Exactly at the moment in the United States when the unemployment rate dropped below 6 percent, the number of new jobs was well above expectations so an interest increase might not be far away, the dollar rises.
Yellen doesn’t (yet) have too much to worry about. A rising dollar leads to falling inflation in the United States. It recently dropped from 2 percent to 1.7 percent and is still decreasing.
In a further rising dollar, the Fed does not need to raise interest rates. Inflation is still limited, wages barely rise so stimulation still can be done by using the interest rate instrument. For the Fed, it is the ideal scenario; declining unemployment, a growing economy and still contained inflation.