Stronger dollar isn't all good news
As the greenback continues to rally against the euro and other currencies, there are both pros and cons.
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| The dollar has rallied against the euro in the past month... |
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| ...and at the same time, oil prices have pulled back sharply as well. |
NEW YORK (CNNMoney.com) -- With the dollar hitting a new 6-month high against the euro on Tuesday, there are a couple of ways to interpret this development. Unfortunately, many of these conclusions are not good.
For one, the recent strength in the dollar may merely be a recognition that Europe and the rest of the world are catching up to the U.S. and we're heading for a prolonged global slump.
"Although we've been talking about weakness in the U.S. economy for some time, the credit crunch and slowdown is newer for Europe," said Subodh Kumar, an independent market strategist.
A global economic pullback could hurt many large U.S. companies that have been benefiting from strong demand for exports.
"A stronger dollar would make domestic-produced goods less competitive," said Matt Kaufler, co-portfolio manager of the Touchstone Value Opportunities fund, which owns shares of several big multinational companies.
What's more, many of these multinationals have also seen their financial results inflated by a weaker dollar as sales made in stronger currencies get a bump when translated back into dollars.
Another reason for the dollar's comeback could be that this is simply a bear market rally in the currency and that the greenback will resume its slide against the euro as it becomes clearer that the U.S. economic funk may last much longer.
"To the extent that we continue to have lower interest rates because of the credit crunch as well as inflation concerns, there will be downward pressure on the dollar," Kaufler said.
But there are some positive signs to the dollar's comeback as well. It could be an indication that inflation may actually become less of a problem going forward than it has been during the past few months.
After all, oil prices have slid as the dollar has gained ground. In the past month and a half, the price of crude has dropped more than 20% while the dollar has increased about 7% against the euro and British pound.
And the prices of other key commodities, which soared as the dollar weakened, have also been in free fall lately.
Corn futures have fallen 16% since oil hit an all-time high and the dollar hit an all-time low against the euro in mid-July. Soybean futures have dropped 17%
This is important since for most Americans, the biggest inflation problems have been rising food and energy costs.
So without a doubt, a stronger dollar would be welcome news to most consumers and investors even if it does hurt exports.
"There may be a decline in exports from the stronger dollar. But I don't view the increased value in the dollar as a negative since reduced commodity prices are beneficial to U.S. consumers," said Bill Knapp, investment strategist with MainStay Investments in New York.
And Kumar thinks that the dollar still has room to run. He said that the political stability of the U.S. compared to other nations will help bolster the dollar.
"When you look at global politics, despite the fact there will be a vigorous presidential election in the fall, there is a lot less uncertainty in the U.S. than say, Russia and Georgia," he said.
In addition, as long as other economies start to look less rosy, that could also help the dollar in the short-run.
"The U.S. is certainly the lesser of all evils when it comes to economic growth," Knapp said. "The U.S. is much healthier than other parts of the world."
But for the longer-term, one market expert said that the U.S. economy and other economies have to rebound in order for the dollar to enjoy sustained gains.
"There may not be a huge dollar rally until the economic problems worldwide are dealt with. Everyone is in the same boat. Europe is linked to the global economy," said Doug Roberts, chief investment strategist for Channel Capital Research. "Just because you bottom out doesn't mean you can't bounce around the bottom for some time." 
