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Global Macro: Dollar Continues Higher as Foreign Economies Remain Weak

The PowerShares DB US Dollar Index Bullish (UUP) continues to trend higher as foreign economies remain hampered by weakness.

U.S. stimulus tapering, alongside continued easy policy in Japan and a credit rating downgrade in the European Union, has led the U.S. dollar to remain one of the strongest currencies in the developed world.

The Federal Reserve chose to taper stimulus on Wednesday, as policymakers stated the benefit of bond purchases had been reduced due to a ballooning balance sheet. The economy has also improved with both a stronger labor market and improved business activity. The positive data has allowed for a stable environment to reduce stimulus in.

The strength of the U.S. dollar has also been magnified by weak foreign policy. The Bank of Japan released comments on Friday that intended on leaving its unprecedented stimulus unchanged through 2013. The dollar's move higher against the yen has allowed the BOJ to avoid spending increases, while benefitting from economic growth through increased exports.

Against the euro, the dollar has also gained relative strength. Standard & Poor's downgraded the European Union on Friday. The downgrade comes a day after the EU reached a deal to overhaul the region's banking sector. The deal has been criticized by many as not doing enough to assure an improvement in the risk management of financial markets.

The S&P report stated that the EU region's commitment to running a balanced budget was in question. Although the move by the ratings agency is hotly debated, it nonetheless reflects a weak economic environment.

With the two major currencies that trade against the dollar weakening, it seems as if the U.S. currency's rally has the fuel to move higher. Look for higher interest rates to sustain the rally into 2014.

UUP Chart
UUP data by YCharts

At the time of publication the author had no position in any of the stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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