The prospects of the US economy are dimming, but still look brighter than those of the eurozone or Japan, which might boost the value of the US dollar in the long-term. UK’s Chancellor of the Exchequer Gordon Brown said on Sunday that, in his view, Britain and the United States will lead in the economic development in the G-7 group this year.

"We’ve got a recession in Italy, we’ve got low growth in Germany, we’ve got a downturn in France," Brown said.
This bodes ill for Europe whose currency is dragged down by the uncertainty over the French referendum on the Constitution and the flop of Gerhard Shroeder’s party in the regional vote. In the US, on the contrary, the dollar gets upward momentum from the forecasts of GDP growth that is expected to be pinpointed at 3.7% in the numbers that are due to be released on May 26, up from last month’s 3.1%. Despite the slowdown in economic growth, the US will still be the leader of the industrialised world in the rate of economic expansion.

Rise in GDP has one important implication: healthy economic indicators can push the Fed to raise the interest rates once again. Currently, the Fed funds rate is at 3% and has experienced eight consecutive rises in the past meetings. In contrast, the European Central Bank’s rate is now at 2% and is unlikely to be increased in the near future against the dismal performance of the European economy.

One of the data that have weight in assuring investors that the US economy is doing well is the trade balance. While a decrease was not even contemplated on May 11, the economists were surprised to see the US current account gap rise less than expected to $60.6 billion from $55 billion in the previous month. The forecasts envisaged the gap amounting to $62 billion. The shrinking of the deficit rise against the expectations contributed to the rise in the greenback. A further decline in the trade deficit would have similar effect, to say nothing of the drop in the deficit.

The breakthrough effect that could dwindle the US trade deficit, at least in its trade with one nation, China, would be the revaluation of the Chinese yuan that, as American administration hopes, would raise the value of the yuan that is artificially kept low to stimulate Chinese exports. Fed Chairman Alan Greenspan gave a different opinion on Friday saying that the change in China’s policy will not narrow the US trade gap as it would make American consumers change for the consumption of other foreign products but will not push them towards the consumption of domestic goods.

The exact timing of the revaluation of the Chinese currency remains a mystery that holds forex markets under spell. The markets become anxious at the news like the unknown internal commitment of the Chinese Vice Premier Wu Yi that unexpectedly drew him home or a recent inadequate translation of the editorial in People’s Daily, China’s governmental publication that flew around the world in Bloomberg’s interpretation roiling exchanges with the news of imminent revaluation that later proved to be false.

Another piece of data that will be released soon and will impact the dollar value will be the Personal Income and Personal Spending indices that are expected to be equal to 0.6% and 0.8% in April, up from 0.5% and 0.6% in March respectively. Strength in consumer earnings and spending will add to the incentives for the Fed to raise interest rates in the next meeting. A rise in the Fed funds rate will mean that investors are more likely to be attracted to the US as opposed to Europe and other economies where rates are low, which, in turn, will boost the value of the US dollar.