The Rise of the Dollar

Chart of the Week for November 25-December 1, 2005

It was a momentous week for the dollar as it rallied to two-year highs against the Euro and the Yen. The strengthened dollar is due in part to massive inflows of foreign capital of $101.9 billion in the month of September. This inflow eases fears about the funding of the US trade deficit, which posted a new record high of $66 billion last week, and confirms that foreigners continue to favor US assets. The Euro appears to have fallen against the dollar more recently as a result of the European Central Bank's unwillingness to raise rates in light of sluggish economic growth. The same is true in Japan as the Bank of Japan holds its monetary policy steady. As the Federal Reserve continues its recent tightening of interest rates, foreign investors are attracted to the higher rates of return in the US.

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