NEW YORK (TheStreet) -- It seems as if the market is turning to favor the U.S. dollar. The market for euros in terms of dollars has fallen below $1.3600, and Thursday euros have been trading as low as $1.3438. There is even some chatter around the market that this rate may fall as low as $1.3200 by the end of this year.
This is a different market feeling today than two weeks ago, when the U.S. dollar was not so strong against the euro. The difference seems to be the recent testimony before Congress of Federal Reserve Chair Janet Yellen.
The key statement made by Yellen: interest rates may rise sooner than expected.
Although relatively benign, the tone of her comments has received a great deal of attention and, given the situation faced by Mario Draghi, President of the European Central Bank, has been taken as a signal that the U.S. dollar should become stronger in the near term.
Last month Draghi and the ECB dropped interest rates, lowering one policy rate below zero. Furthermore, there is still major concern that the eurozone may fall back into recession, which would put pressure on the Central Bank to consider further easing measures -- even to consider the possibility of creating its own brand of quantitative easing.
Yellen, in her testimony, alluded to the fact that the economic recovery in the U.S. might be recovering more rapidly than had been thought recently. This might contribute to the need for interest rates to rise sooner than previously expected.
U.S. monetary policy would become tighter relative to European monetary policy. And this tends to result in the value of the currency of the tighter-money country rising against the currency of the easier-money country.
We might be at a turning point for the value of the U.S. dollar.
The question is: what will be the timing of the interest rate rise in the U.S.?
I am concerned about the reason for a rise in interest rates, too. Right now, officials at the Federal Reserve seem to be thinking that short-term interest rates will begin to rise by the middle of 2015. And the general assumption seems to be that the Fed will cause that rate rise.
But there is almost no demand for short-term interest rates to rise in the U.S. The commercial banks are sitting on almost $2.7 trillion in excess reserves. It is not expected that the Federal Reserve will remove reserves from the banking system to cause a rise in short-term interest rates.
The effective Federal Funds rate traded last week at around 9 basis points. Over the past year, it has primarily been in the range of 8 basis points to 9 basis points, although it has gotten as low as 6 basis points and as high as 11 basis points.
There is just no demand for funds relatively to the supply of funds that are available.
I don't see the Federal Reserve starting to pushing up rates here any time soon.
The economy is recovering so slowly that the demand for short-term funds will remain low until faster economic growth is achieved in the U.S. This is why the Federal Reserve does not expect short-term interest rates to rise until well into 2015.
Longer-term interest rates were supposed to rise this year and into next, but we have again been surprised by funds flowing into the U.S. Treasury bond market from foreign countries. The flow dropped off in the first quarter of 2013, but it has been rising since. And it's a major reason why longer-term U.S. Treasury rates have not risen as expected this year.
The economics beneath the recent strength of the U.S. dollar against the euro, therefore, seems to be that the U.S. economy, for the near term, will be stronger than the economy of the eurozone. This will eventually cause short-term U.S. interest rates to be higher than short-term eurozone rates. And Yellen seems to recognize that.
At the time of publication, the author held no positions in any of the stocks mentioned.
This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.