Is US dollar strength a serious threat to the world economy?

Some have suggested that further appreciation of the dollar would pose a significant threat to the outlook for the world economy. In contrast, we think that the US currency is unlikely to strengthen dramatically from its current level. And even if it does, the world as a whole is now well placed to cope. To recap, the dollar has risen by about 3% in trade-weighted terms since the US election, as the prospect of a large fiscal stimulus under President Trump has fuelled expectations of stronger growth and more aggressive tightening in monetary policy there than elsewhere. Our US service remains the place to look for detailed analysis of the prospects for its economy. (See our quarterly US Economic Outlook, published on 5th December.) In brief, we forecast that the dollar will appreciate by another 5% or so in trade-weighted terms over the next two years, which would be a small move compared to its gains since mid- 2014. The first point to make is therefore that the big move in the dollar and hence the biggest risks are probably already behind us.