US economic growth is expected to have expanded by about 4% at an annualized pace and this will strengthen the dollar in early 2010. This recovery is weaker than previous upturns following recession and may limit the upside for the U.S. dollar in the short term against other major currencies.
Because of the low U.S. inflation rate and the Federal Reserve’s grit to keep interest rates low, the dollar has become a preferred tool of the “carry trade,” endangering the world economy. By borrowing U.S. dollars cheaply (because U.S. interest rates are being artificially depressed by the Federal Reserve in an effort to ease credit and by doing so stimulate economic growth) and exchanging them for foreign currencies to lend or invest, traders can earn generous profits — though not without great risk. The carry trade may be a factor in recent rises in commodity prices; indeed, there is fear of new bubbles as a result of all the dollars sloshing around in the world economy. This poses dangers for the global economy because the carry trade is susceptible to runs. If a speculator borrows dollars in the short term to minimize interest expense and uses them to buy euros, say, and the dollar surges in value relative to the euros, the speculator may have to sell his euros in a hurry to repay his lenders. If so, the value of the euros will fall farther relative to the euros, which may precipitate a run on euros as speculators unload them. And because of the integration of the world’s financial systems, a run on a foreign currency can harm other countries’ economies.