Productivity...the Key Driver of Currencies.
High growth and low inflation = stronger currency.
Low growth and high inflation = weak currency.
Currencies trade on these on a relative basis. A country growing at 2% would have a weaker currency than a 3% grower, but stronger than a 1%. Same is true with inflation rates.
When one combines the relative rates of growth + relative rates of inflation (adding in deflation) and compares country to country the sum is the RRRR.
relative rate of real return.
For US: Growth 2% minus inflation 2% = 0%
Zone Growth 1% minus inflation 1% = 0%
Japan Growth .5% plus .5% deflation = 1%...Japan is favored
But this is not static because the expectation for both the growth rate and inflation rates change, example what the pound is going through. Lower trade levels mean lower expected growth + higher expected inflation = weaker pound.
Any economic number is yesterdays news, the market tells you what the consensus view is between buyers and sellers.
When the growth rate slows and inflation rate rises then gold/silver shine. They dull in the opposite environment.
The above is true in good times...
But when times are bad, there is a rush out of smaller currencies into majors for a safe haven. During the last downturn in 2008 both the USD and Yen had the status.
So why is the dollar going up...who knows!
Could be rush to safe haven, growth rate is increasing, interest rate is going up, or inflation is going down, when compared to these factors for every other country in the world.
