Europe Economy

Dollar Not a Crisis Casualty, Will Rebound: Strategist

The current weakness of the US dollar may make it look like a casualty of the crisis, but "this interpretation would be premature," Commerzbank foreign exchange strategist Lutz Karpowitz wrote in a research note.

The dollar will resume an upward path towards the end of this year or early next year, when it will become obvious the US economy is recovering quicker than others largely due to its flexible labor market which makes it easier for businesses to operate, according to the research.

The three arguments in favor of the prolonged dollar weakness theory – danger of massive inflation, sustainability of fiscal deficit and the end of the greenback's role as world reserve currency – don't stand up to closer examination, Karpowitz wrote.

The Federal Reserve has more than doubled the central bank monetary supply within a short space of time, but "the Fed's expansionary impulse is losing its impact in the banking system," while the broader measures of money supply have not reacted so far, putting no pressure on inflation.

The Fed is in a position to and willing to restrict monetary policy as soon as inflation risks are rising, he said.

On the fiscal side, the US debt is "by no means excessive compared with other G7 countries," while its global reserve status will not be challenged because "there is no real alternative," Karpowitz added.

"Once the focus shifts back to the positive US fundamentals, the dollar should return to a firming trend," he said, adding that the Fed will raise rates sooner than the European Central Bank.