The recent turmoil in Egypt has many traders wondering how the conflict will affect the currency market. Risk taking was the first to decline as both equities in the U.S. and bourses in the Far East severely declined.
However, the U.S Dollar, still considered to be one of the top currencies in 2011 by Standard Life Investments, maintained much of its strength, and future forecasts suggest it will only continue to gain strength in the coming months. In 2010, the Dollar ended on a high note against the Euro and on a trade weighted basis. Any talk of sovereign bankruptcy has been swept aside primarily by the relative weakness of other competing currencies.
Most of the newfound strength of the Dollar has come from the recent U.S GDP number. Although a growth of 3.3 – 3.4 percent was originally estimated, actual reports indicated a growth of 3.2 percent for the quarter which was well above the 2.6 percent from the previous quarter.
The reported growth created an overall positive sentiment for the U.S. dollar in the market, which will only help further strengthen it. Many analysts even believe that the dollar is now in rally mode.
Although the Dollar seems to be climbing upwards, there are a few long-term risks that still haven’t been accessed. The current public debt crisis and low short-term interest rates are still keeping risk-taking investors looking elsewhere. These long-term risks indicate that the current strength of the dollar could be more short term as its current positive value is being propelled by the EU economic crisis and the U.S. budget cuts.
The U.S. Dollar may avoid the negative effects created by the conflict in Egypt, but the Pound Sterling doesn’t look so lucky. The Sterling has been able to gain strength against the Euro with the UK’s new attempt at economic revival, but the escalation of conflict in Egypt could cause it to weaken against the U.S. Dollar.