Russia’s rouble is struggling, the euro is flirting with another recession, but the US dollar is having a great year. But can it last?

Just a few years ago, the US dollar was the Rodney Dangerfield of currencies: it couldn’t get any respect.



How times have changed. Mark this moment: America has actually done something right financially. The US dollar is a star, and it’s because of billions of dollars of some of the most controversial stimulus programs in history.



The dollar is surging in value while most of the world’s major currencies are struggling – other nations, facing slower global economic growth, have tripped, had missteps or hesitations. Through early December, the dollar gained 11% versus the euro, and 13.2% versus the Japanese yen.



It’s not just currencies. The dollar represents the health of the US economy, and there’s a big gap between the US and other nations in economic growth. The US is trending upward, while other major economies are slowing. After a slow start to 2014, US gross domestic product, or GDP, boomed 4.6% in the second quarter and 3.9% in the third quarter.



That compares to two quarters of negative growth in Japan, inviting a recession and slow growth. Meanwhile, the Eurozone saw only minor blips of growth at 0.1% and 0.2% in the second and third quarter, respectively.

“Essentially, the US economy is the best-looking house in an ugly neighbourhood,” said Ryan Sweet, director of research at Moody’s Analytics. “Europe is a mess, Japan is in a recession, China is weakening and emerging markets are slowing.”

Who gets the credit?

It goes to the much-maligned Federal Reserve, say some experts. Critics have leveled harsh criticism on the Federal Reserve in recent years for its unorthodox, aggressive, and wide-reaching monetary policies – from bailouts to cheap loans to billions in stimulus. There has been a Tea Party-driven “end the Fed” movement championed by former presidential candidate Ron Paul, who also wants the US to return to backing the US dollar with gold. There’s also the lesser known but no less vocal “audit the Fed” movement, which posits that the central bank has meddled with the economy to disastrous results.

But, contrarians say, you can’t argue with results. Some experts are holding up US economic growth now as proof that the Fed did the right thing during the crisis.

“The US economy is the best game in town because of the success of the Fed,” said David Jones, president of DMJ Advisors, a Denver-based consultancy firm.



Facebook Twitter Pinterest Former Federal Reserve Chairman Ben Bernanke: central bank activist. Photograph: BRENDAN SMIALOWSKI/AFP/Getty Images

Jones, who praised the Fed’s “central bank activism,” gave credit to former Fed chairman Ben Bernanke, who studied depression economies and advocated for early and plentiful stimulus during the financial crisis in 2007 and 2008.



“Central bankers can do one thing that no one else can do: they can create money out of thin air,” he said.

“Bernanke dealt successfully with the crisis, and he should be given credit for it. Now, the dollar is strengthening, while the yen and the euro get weaker because they were slow to react,” concluded Jones.



Europe and Japan were late to Bernanke’s controversial stimulus measure, quantitative easing, in which the Federal Reserve bought billions of dollars’ worth of mortgage bonds and Treasury bonds to keep interest rates low. Low interest rates, in turn, were designed to spur spending and economic growth.



Theoretically, quantitative easing also helped jumpstart the US economy through low, long-term interest rates, which in turn spurred consumer spending. Also, it provided a pop to mortgage refinancing activity, and overall helped improve business confidence. Finally, of course there is the wealth affect, as low rates forced investors into equities, and the subsequent stock market gains also increased consumer confidence.

Other central banks have followed Bernanke’s example.



“Japan is now in the process of more aggressive QE. They are using monetary policy following the Fed’s example to boost the economy. It has depressed the Japanese yen and boosted their stock market, just like in the US,” Jones added.

What did US policymakers do right? And, are there lessons other advanced economies may want to heed?



One thing, say experts, was moving fast on various kinds of stimulus measures, without even knowing if they could work. Action beats inaction, say economists.



“America used massive firepower early. Not only was it big, it came fast. That is why the US is looking good. Early and fast is better than late and little. Europe is late and little,” said Cary Leahey, senior advisor to Decision Economics.



Facebook Twitter Pinterest Critics have compared the Fed’s stimulus measures, like quantitative easing, to ‘printing money.’ Photograph: Alex Wong/Getty Images

That’s not to underplay to risks of the Fed’s move. The Fed slashed its key policy rate to zero to 0.25% by December 2008, and established an unconventional large scale asset purchases program, known as quantitative easing. The massive bond-buying initially depressed the US dollar.

QE loaded the Fed with debt. The Fed’s balance sheet soared from about $850bn before the global financial crisis to a high-water mark of $4.5tn currently. The Fed recently concluded its QE3 asset purchase program in October.

Of course, even policymakers doubt whether all the credit belongs to QE.



“You will see mountains of papers written over the next 30 year analysing what it actually did or didn’t do. But, the Fed was the first major central bank to introduce QE and it was the most aggressive out of the block,” said Bill O’Grady, chief market strategist at Confluence Investment Management.



Other areas also took half measures. The ECB has been notoriously slow to embrace actual outright sovereign bond purchases. Despite the internal opposition to outright purchases, the ECB has been hinting that it will buy sovereign bonds in 2015 if current measures fail to raise the level of inflation or inflation expectations.

Japan, whose long recession acts as a cautionary tale in the world economy, has been battling slow growth and deflation, or low prices, on and off again for nearly 20 years.



While the Bank of Japan (BOJ) did experiment with quantitative easing in the early 2000s, the country has not been able to fully conquer its slow growth and deflationary tendencies.

DMJ Advisor’s Jones compares the size of Japan’s QE to the Fed’s. “Before the crisis in 2007, the Fed’s balance sheet stood at 7% of GDP. When the Fed ended QE3 in October 2014, that had climbed to 25% of GDP.”



The Bank of Japan is holding much more debt – from 20% of GDP before the financial crisis to almost 55% now, Jones said.

Japanese prime minister Shinzo Abe came into office in December 2012 with sweeping “Abenomics” policies aimed at stimulating growth. It has made inroads, but progress has come in fits and starts as the country also raised key taxes like the consumption tax.

The drop in commodities from corn to gold to oil helps the US economy and the US dollar, because other countries have to exchange their currencies to buy their commodities in dollars. That promises resilience for the dollar. It’s been a long wait.

