Forex Gump

The paralyzed US economy may have some reason to cheer, with President Obama managing to get a massive USD 819 billion stimulus package ratified by the US House.

Sounds confusing! Common wisdom suggests that as a nation’s exports increase it forex inflow should rise and it trade surplus should grow.

Bad news, bad news and bad news is all that has being heard about the US economy! Employment has fallen, consumption is down, and exports have been hit. But, the US dollar seems to be ignoring all this and quietly strengthened early this week.

There seems to be no respite for the ailing US economy as unemployment rises and housing prices continue their downward march.

The US Fed appears to have done the unthinkable – bring interest rates close to zero. Its actions seem to be aimed at kickboxing the economy out of doldrums. Monetary easing can be an effective tool to change the trajectory of economic growth, but such low levels of interest can prove dangerous.

The world’s fastest growing economy and its engine of growth appears to be headed for a substantial slowdown as per latest data released by the World Bank. China’s exports have started shrinking and even its imports have been marked by a severe contraction.

If we were to go by the traditional definition of a recession, the US is still not in recession! The technical definition of recession requires an economy to contract in two consecutive quarters. That is yet to happen.

Obama has a new economic advisory team in place. Obama-speak on fresh economic initiatives with a new team seems to excite investors. This leads to a return of risk appetite and investors seem to be willing to look at other options than staying hedged with dollar investments.

The answer to this question depends upon global economic conditions. A strong dollar may be helpful when the global economy is doing well and the US economy is growing as a strong dollar make imports into the US cheaper.

President elect Barrack Obama seems to have a tough job at hand as far as the economic situation is concerned. Deflating stock and real estate markets, falling consumer sentiment and rising unemployment are some of the challenges that Obama will need to address as soon as he steps into the Presidential shoes