Thursday, June 17, 2010

A weaker dollar reflects good news for the U.S.

It's time to revisit this chart, since important changes are afoot. The dollar has suffered a sharp reversal in the past 10 days that coincides almost exactly with a rebound in equity prices. (Note that the dollar is plotted in inverse fashion, so the rise in the red line reflects a decline in the dollar's value.) This development most likely reflects a decline in concerns over whether the Euro debt crisis could threaten the global economy via another banking crisis. Demand for the dollar as a safe haven has declined, at the same time that the outlook for the U.S. economy—which so far shows few if any signs of Euro debt contagion, as reflected in the recent decline in swap spreads back to more normal levels—has improved. The Euro crisis remains a big concern in Europe, but markets are breathing a sigh of relief now that it appears that it will not be a serious threat to the U.S. or to the global economy.

It's not often that a weaker currency implies good news for an economy, but this appears to be the case now.

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