The dollar has soared to multi-year highs against a range of currencies in recent weeks, but that's not a testament to strength in the U.S. economy, Tom Hutchinson, senior editor of the Newsmax newsletter "The High Income Factor," told Newsmax TV.
Economic growth slipped to 2.2 percent in the fourth quarter from 5 percent in the third quarter, and many economists predict mediocre growth in the first quarter too.
"It's not that we're so good, it's just that everybody else is so bad," Hutchinson, a member of the Newsmax Financial Braintrust (FBT), told Newsmax TV's "America's Forum," explaining the dollar's strength.
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"This [U.S.] recovery has been pretty anemic," he said. GDP has grown a bit more than 2 percent a year since the recession ended in 2009.
But, "if you look at Europe and Japan, we're doing great," Hutchinson said. The eurozone economy grew only 0.9 percent in 2014, and Japan's economy shrank in two of the year's four quarters.
"Not only are we in better relative economic shape, but we also have divergent central bank policies," Hutchinson explained.
"The Fed has ended its bond buying program and is on course to start raising rates. They're going completely the opposite direction in Europe and Japan, with massive bond buying programs and near zero interest rates. For those two reasons, the dollar is soaring."
The greenback hit a 12-year high against the euro and a seven-year high against the yen earlier this month.
Hutchinson expects the dollar to keep rising. That's "because the dynamic that has driven it higher still persists," he explains. "We're on track to raise interest rates, while Europe is not reversing course any time soon with their liberal central bank polices."
Many economists expect the Federal Reserve to begin raising interest rates in September.
So is the dollar's strength good for the United States?
"It depends who you are," Hutchinson said. "If you're a regular American consumer, it's pretty good. It's keeping prices down, it's making imports cheaper. The downside is the stock market, because we have a stock market here that's pretty highly valued."
The S&P 500 had a trailing price-earnings ratio of 20.52 as of Friday, up from 17.97 a year earlier. That's "historically pretty high," Hutchinson noted.
"What's happened is the high dollar is causing exporters' earnings to drop. It's estimated that in the first quarter, S&P 500 companies with 50 percent or more of their sales overseas are going to see earnings drop double digits."
But to justify stock prices at this level, "you need strong earnings, and the strong dollar is putting a huge bite in that," Hutchinson said. "That's making a lot more uncertainty in the market."
The S&P 500 index stands within 1 percent of its record high.
It's important for the Fed to raise short-term rates because they have been near zero since December 2008, he said. "The economy justifies a higher level of interest rates so you don't fall behind the curb later as you get inflationary pressures."
About Tom Hutchinson
Tom Hutchinson is a member of the Newsmax Financial Brain Trust. Click Here to read more of his articles. He is also the editor of The High Income Factor. Discover more by Clicking Here Now.
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