Online Currency Trade

Effect of Inflation on the U.S. Dollar and Economy

There are numerous factors weighing in on the performance of the U.S. Dollar in the forex and financial markets, including the trade deficit, the housing and credit woes and rate cuts. However, another factor that should be considered in long term evaluations of the Dollar is inflation.

In simple terms, inflation refers to an increase in the price of various commodities and is indicative of the state of the economy, and in this case, the U.S. Dollar as well. The report from the Labor Department is that for November 2007, inflation was up 0.9% and core inflation up 0.3%.

There are several factors that contribute to this, but chief among them is the energy price surge, which went up 19% in 2007 compared with 3% the previous year. This, most forex analysts believe, is due to the skyrocketing oil prices.

It should also be stressed that inflation figures do not always include the rising costs for other services like health insurance or education which have gone up. Another factor that should be considered by forex traders in analyzing is that outsourcing of products and services, widely used nowadays, may not be able to keep inflation down for long.

The issue of possible runaway inflation is a cause for concern in the Federal Reserve, because it can hamper their strategies concerning rate cuts. Traditionally, increasing rates is considered the most effective way of staving off inflation (and can also help revive the U.S. Dollar in the forex) but that simply cannot be consider right owing to the state of the economy.

The United States GDP grew by 4.9% for the first three quarters of 2007, although the figure dropped to 1.5% in the period from October-December. While some projections are for a slow but steady growth of about 2.2% for early 2007, nothing can be said for certain right now, and the rising inflation makes analysis even more difficult.

The latest figures from the forex indicate that the US Dollar is at all time lows against the Euro and the British Pound, But even does not take into account the fact that the greenback has been steadily losing in value since the 1930s. This is one of the reasons why the U.S. national debt is reaching record levels also.

Making a prognosis for the U.S. Dollar has never been easy, not even for experienced forex analysts, and now, with so many issues coming into play, the best thing for a trader or investor to do is to take all the news and analysis, but at the same time not to accept them at face value.

For now, the best that a forex trader or investor can do with regards to the Dollar is to analyze the situation as best as he can, and avoid reaching conclusions based on what he desires, rather than on the bare facts. Objective analysis is more essential than ever.