Last Week’s Dollar: Why the Big Jump?

In the past I have written about the US dollars tough battle against a downward spiral. In short, the UnitedState’s dollar is fighting an increasingly gargantuan federal deficit and the prospect of continued low interest rates neither of which bode well for the strength of the dollar.

With that said, what happened last week that caused the dollar to soar against the shekel? Friday, October 23rd, saw the dollar close at 3.6972 while a week later on Friday, October 30th, the dollar closed at 3.7545 a jump of 1.5% in only seven days!

One, the Bank of Israel announced that it was not going to increase interest rates for November. Without going into detail and speaking only in broad terms, lower interest rates make a currency less desirable.

Two, reports that the United States economy grew for the first time in over a year. Helping this was another report that found that factory activity in the mid-US had also expanded. These reports help paint a picture that America could be on the road to reducing its debt and on the way to full economic recovery.

Three, and this might be the most important point, the market has been volatile this year (generally, for the good of everyone) and the end of the year is approaching. A financial advisor in Israel explained to me a current phenomenon: this past year has seen investors using the US dollar as a proxy for taking or reducing risk. In other words, when investors want risk, they sell dollars and when they want security they buy in dollars (investing in treasury bills and the like). The increase in dollar-based investment leads to an increase in demand and a shortening of supply hence the US dollar rises. More specifically, people are looking to hold on to whatever profits they have made this year and are buying dollars to secure these investments.

Please note: While this last item could affect the dollar for the next two months, this is in no way a prediction of the future. I have merely commented on the past. For an accurate read on what will/might happen, please visit your locally licensed financial advisor (i.e. not me).

Special thanks to the following periodicals that help me be an educated consumer:

New York Times Global Edition – Business

Globes: Israel’s Business Arena

Daily Forex

Forex Capital Markets

Tizku LeMitzvot [May you continue to merit doing good deeds],

Shuey

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