Where do threats of instability come from?
There are several major factors. Inflation is a big one. Another factor is the growth rate of the economy, and as you know there are concerns that the U.S. economy could slip into recession, induced by declines in the housing market. Growth in Europe and Japan, and more so in China and India, leads to generally higher rates of return for people who invest in those countries.
What are some other factors that can cause instability in exchange rates?
Threats of war are an obvious one. If there were another major terrorist attack in London, it would probably lead to a stronger dollar. Oil is another one. Oil is priced in dollars. Then the question is: How do the producers of oil invest the dollars they are saving? If they're investing in dollars, then that's good for the dollar. If not, it could weaken the dollar.
How could the dollar get stronger?
Well, the trade deficit is weighing on the dollar, and if the United States can grow its way out of the problem, that would be great.
Will you make a guess about which way the dollar will go over the next year?
I'd prepare for the full range of possibilities. Investor psychology is all over the map.
