BHP Billiton Limited (ADR) (BHP), Rio Tinto plc (ADR) (RIO): How the Strong-Dollar Call Could Turn Out Dead Wrong

Looking forward, the relative strength of economies around the world will play a big role in currency direction. Those calling for dollar appreciation believe that the U.S. economy’s strength will continue, with factors like ramped-up energy production helping to reduce imports and bolstering the fundamental strength of the nation’s trade balance. Meanwhile, Japan and Europe are going through more severe austerity measures, while resource-driven economies like Canada, Australia, and several emerging markets stand to suffer at least short-term from the plunge in commodity prices.

But the strong-dollar call could prove dead wrong in two ways. If measures from foreign central banks succeed in reawakening global economic growth, then the unexpected strength abroad could bolster U.S. investors’ interest in putting their money overseas again, boosting other currencies. Meanwhile, if the U.S. economy falters, whether from an unforeseen geopolitical event or from simply underperforming the relatively high expectations investors have of it, then interest rates could start to drop back again and lead foreign investors away from the dollar.

What to watch for
With currencies, relative movements are just as important as absolute ones. So as you look at economic data from around the world, don’t just focus on whether news is good or bad but also on how it compares to other countries. That will give you the best clues toward the dollar’s moves and help you see its impact on the multinational companies whose fortunes rise and fall with currency movements.

The article How the Strong-Dollar Call Could Turn Out Dead Wrong originally appeared on Fool.com and is written by Dan Caplinger.

Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.