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Reasons why the dollar rules


Back in January 1999 the euro was heralded as a strong currency that would soon outshine the dollar. Europe had a surplus on its external balance of payments and tight fiscal policies. The US had a huge current account deficit, net external liabilities and budget deficits. The dollar was bound to dive. How wrong the dollar bears have been.

Nevertheless they continue to trumpet the same old arguments for expecting the dollar to lose ground this year. They cite the huge US current account deficit and external liabilities as the main reason, even though experience has contradicted this theory. If the current account deficit were enough to skittle the dollar, it would have happened eons ago.

A widening US current account deficit has not indicated a weaker dollar. Over the past three years, the external deficit has widened to over 4% of GDP and the US private sector (corporate plus household) deficit reached unprecedented levels at the peak of the equity bull market.

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