Is USD a currency to buy for Singaporeans?

The US economy has made steady progress since the financial meltdown in 2008. While the recovery is a slow and painful process, there are more glitters of hope to be seen in America.

Investors around the world are seeing growing optimism in the economy, and probably are thinking of cashing in on the possible strength of the US dollar. It is worthwhile to consider many factors before making any decisions.

A recovering housing market

At the heart of the economic crisis is the near collapse of the housing market. Indeed, as interest rate rises during roaring economy, homeowners that have purchased new flats may face greater borrowing cost, given that some may have their mortgage rate based on a floating rate.

When the economy falters, the home value falls dramatically and can drop below their initial purchased price. As such, homeowners are caught with double blow: a higher borrowing cost due to buying at the peak cycle of the economy and a deteriorating housing value.

Worst still, many homeowners lost their jobs and are unable to service their mortgages.

Things have brightened since. The average initial jobless claim figure has come down and unemployment rate has fallen though the figure can be controversial since it could be due to people leaving the labor market. However, the overall employment seems rosier than one year ago.

Home sales have also picked up. This is crucial because it helps to propel housing prices to go up and enhance the value of homes.

With greater home value, there is potentially larger safety net for household to spend more without worrying that their overall household net asset is decreasing. In simple terms, it can encourage greater spending especially during festival season.

Central Bank Guideline

The Federal Reserve has since June been hinting on a possible scale back in its Quantitative Easing (QE) program. This has prompt many investors to predict a possible appreciation of the dollar in the near future. The Fed has tied such decision mainly on the outcomes of the labor market, essentially the unemployment rate as well as inflation target.

There is a real concern on whether the labor market healing process can sustain its traction and the continued low to moderate inflation is a worry point for the Fed given that they do not wish to face the risk of deflation as seen in Japan. Given that there are some downside risks to reducing the QE, investors have been guessing the timeframe to be in the near future and with a gradually withdrawing of the QE.

However, as Ben Bernanke term ends late January 2014, the appointment of a new Fed Chairman is critically important. As each Fed officer has his or her own opinion of the time frame to withdraw the QE, the likelihood of one candidate to assume the post in the race for Fed Chairman position will be factored into the dollar strength. Although in recent period, Janet Yellen has been picked as the possible next Fed Chairman, the future policy guideline is uncertain.

In addition, communication of Fed policy has been increasingly disappointing. Investors are probably confused at times in obtaining a clear direction of the Fed’s forecast and outlook into the future. As such, communication of policy can have drastic impact on the strength of the dollar.

Politics of the economy

The deadlock between the two political parties has put the US economy on a downhill. The recent partial shut down of the US government has a far-reaching and profound impact on the economy that is attributing to the detrimental health of the dollar.

The perceived dysfunction of the government due to political deadlock on different issues, especially budget and borrowing limit has exhausted investors’ patience with the government.

As the partial shutdown takes place, numerous workers may be put out of job temporary and with a perceived unstable job prospect, there can be potential cut back in spending. This will weaken the economy and pull back the GDP growth for the year.

As such, the US dollar has seen a weakening of strength during the period when the shutdown takes place. Hence, markets will factor in such political uncertainty and there is potential risk to the dollar although it is widely expected that both parties will come to an agreement to end the self-inflicted economic pain.

Even when the spending budget can be finalized, the next obstacle, which is the borrowing limit problem, will surface. It appears that the dollar will have a rough ride ahead as politician wrestle their arguments and coordinate to reach a compromise and decision.

A short-term borrowing limit increase may not be a full cheer to the market given that it is widely thought that near the end of the short term increase, there would be another round of wrestle. Investors wish to see a clear compromise on both isles to give certainty to the market.

While there are many other factors that can affect the US dollars, one should study and carefully assess the overall global economic landscape as the strength of the dollar is relative to the performance of other economies. As such, it is also important to compare the economic condition of US with other countries when making a decision.

A wise decision should be one that is carefully analyzed and well studied.