The dollar has been making a strong move in recent weeks after holding firm for several months in light of ongoing financial concern. There has been little fanfare surrounding the gradual improvement over time in the greenback thanks largely to continued focus on other aspects of the economy. Credit, housing, retail, and unemployment have been among the focal points as the dollar has quietly improved.

Last week, the dollar surged past 110 yen, which actually positioned it about halfway between the all-time high above 125 yen from the summer of 2007, and the low of 97 early 2008. One dollar currently nets just 108.55 yen as the carry trade was pushed back on Tuesday due to a sharp drop in equities.

The dollar’s increased strength against the major European currencies has been especially impressive over the last two weeks. The Euro broke $1.60 for the second time in early summer but has spent much of 2008 in the upper $1.50s range. Right now, a Euro fetches just $1.4908. The sharp gains for the dollar against the Euro can be credited somewhat to the natural back and forth of currency speculation. However, oil price falls tend to favor dollar gains.

The dollar has certainly benefited from the slide in oil that began after it reached a record high above $147 per barrel in mid-July. In less than one month, oil has given back over $34 to today’s close of $113.01. Actually, oil dipped close to $112 during the New York trade before finishing down $1.44.

One British Pound is currently worth $1.8933, the first time the Pound has fallen below $1.90 since mid-2007, before the UK embarked on a series of interest rate hikes. The Pound climbed as high as $2.06 before steadily falling over the last several months.

It is interesting that the rising dollar has received less attention than one might expect, considering just months ago, some were calling for an even great crash for the dollar when it was 10-15 pips worst against the other major world currencies. Of course, that can be partly attributed to a change in economic perspective from recession talks to around two per cent improvement in the second quarter gross domestic product. The other big part, as mentioned, comes from the huge oil reversal.

So what does a better dollar mean for Americans? It has already helped with lower and middle-class consumers struggling with gas and grocery prices. Inflation concerns have somewhat eased thanks to a more valuable dollar. Gas has been following oil movement as it has dropped over 31 cents per gallon on the national average since its record July 17, to today’s price of $3.799. This is according AAA and the Energy Information Administration. Some areas in the Midwest have seen gas prices fall below $3.50 per gallon this week.

Other affects of a stronger dollar include greater buying power around the world in countries that had seen relative stronger currencies. This makes travel abroad and business imports more economical. It also makes it a little less advantageous for foreign travels that have enjoyed the opportunity to take cheap vacations to US destinations in recent months.

Perhaps more importantly, a relatively strong dollar offers some psychological hope to Americans looking for something positive to build on. A dollar with strong buying power creates a great value proposition for all American consumers in any market.

Market Recap

It was a volatile open to the trading week for equities, with wild swings that left the Dow with a modest 52 point gain. Tuesday was a little more one-directional. The Dow dropped 139 points, with the NASDAQ and S&P down 9 and 15 points on the day. Bad news from JPMorgan brought the financial sector burden back into the forefront for traders. Crude oil dropped $1.44 to close at $113.01, a cool $34 below the record high just about one month ago. The dollar has firmed up against most major currencies.

Neil Kokemuller
Tuesday, August 12, 2008
11:33 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.