A “price” is never “guilty” of anything. It´s just a variable that reflects its fundamental determinants!

Matt O´Brien does a long and convoluted analysis on the dollar in “The strong dollar is the biggest threat to the economic recovery

So the dollar, in other words, is strong because the U.S. economy is strong, and it is about to get even stronger because the Fed is about to start tightening even more. Well, that and the fact that the rest of the world is slowing down.

He could have been more simple and explicit. Saying the strong dollar reflects the (relatively) strong economy is fine. Saying at the same time that it is the biggest threat to the economic recovery is just the common mistake of reasoning from a price change.

What is clear, however, is that it´s not the strong dollar that´s the big threat to recovery. It´s the fact that the Fed is “about to start tightening even more”. Among other things, that would cause a shift in the demand curve for dollars, strengthening it. In that case, both the strengthening of the dollar and the fall in the pace of the recovery would be the consequence of monetary policy tightening.


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