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USD on fire up by 7% - BAML

FXStreet (Guatemala) - Emanuella Enenajor, economist at Bank of America Merrill Lynch explained that the US dollar is on fire, rising by 7% since the end of June.

Key Quotes

Although Fed officials and economists have raised concerns that the dollar's rise could hurt the economy, the gains need to be taken in context.

"Here, we look at the real effective exchange rate: a comprehensive measure of competitiveness that incorporates nominal exchange rates and relative inflation. As we can see from the Chart of the Week, the USD has been deflating on a real effective basis since 2002, and is still well below its 20 year average. In fact, the recent USD increase is a mere blip in a much more persistent trend of currency depreciation, leaving trade fundamentally in a much better place than where it was in the last expansion."

"Should markets and Fed officials fear that the currency's rise may be eroding the recovery? To answer that question, we need to quantify the impact of the currency's appreciation on growth and inflation."

"We use a vector autoregression framework to model the dynamics, a technique that allows feedback loops among interconnected macroeconomic variables. In particular, our model includes the real effective exchange rate, the core PCE deflator, real GDP, the US 10-year interest rate and the price of oil.

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