What the U.S. Dollar Will Do Next Will Surprise You

I laughed out loud when I read it…

The “big” news yesterday on Bloomberg was that Goldman Sachs was changing its interest-rate forecast…

I laughed because the change from Goldman was so “late to the party.” And I think they’ve still got it wrong.

What’s happening now has some surprising implications for the U.S. dollar for the rest of this year… Chances are, it will go UP.

[ad#Google Adsense 336×280-IA]Let me explain…

There’s a simple relationship between interest rates and a currency’s value…

When interest rates in one country are higher than in another country, the value of the currency goes UP in the country with the higher interest rate, relative to the country with the lower interest rate.

(This is a general principle, assuming “all things equal” in the two countries… but it doesn’t always work out this way.)

Since 2008, interest rates in the U.S. have been at zero.

But that is about to change…

In 2015, certainly, the U.S. will raise interest rates…

Today, the U.S. economy is back on its feet. Unemployment is falling faster than expected. Inflation is coming back as well. Based on those facts, it is time for the Federal Reserve to hike interest rates – sooner rather than later.

Meanwhile, in Europe, things are not as good…

Interest rates in Europe will need to stay lower, for longer, than in the U.S. Also, Europe needs to do much more to stimulate its economy, which should have the effect of destroying the value of its currency.

So based on the classic principles, the U.S. dollar should go UP versus the euro the rest of this year.

Apparently, the top three currency forecasters on the planet (according to a study by Bloomberg) agree with me.

“We expect the interest-rate hike in the U.S. will be earlier than currently expected by the market,” Julian Trahorsch told Bloomberg. “All indicators point to a very strong recovery in the U.S… In the first quarter, the Fed could already raise. This is not priced into the euro-dollar exchange rate.”

Julian is part of the team of forecasters from the German bank LBBW, which was the top currency forecaster over the last 12 months, according to Bloomberg.

The rest of the top three forecasters (according to Bloomberg) agree with LBBW’s forecast for a stronger dollar versus the euro, for the same reasons (you can read the full article here).

This week, Goldman Sachs joined this party – but a day late and a dollar short… Goldman Sachs changed its interest-rate forecast, but not by that much… Its original forecast was that the Federal Reserve would raise interest rates in 2016. Now, Goldman says the Fed will move in late 2015. The top currency forecasters predict the Fed will move much earlier.

If the best currency forecasters are right… then the Fed should raise interest rates a bit earlier than the consensus thinks. And that should cause the dollar to outperform the euro for the rest of this year – at least.

I agree with these top forecasters…

Based on the facts, I think Goldman Sachs is wrong. I expect the Fed to raise rates sooner than later… potentially early next year.

My paid subscribers know that we are already well-positioned for the Fed to raise interest rates earlier than Goldman Sachs thinks… and that we already have bets against the euro in place.

For the rest of this year, it’s time to bet on a stronger dollar, particularly versus the euro. There’s still time to place your bets now…

Good investing,

Steve

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Source: DailyWealth