Has the greenback reached a turning point? The US dollar index gained more than 10% between March 2018 and April 2020. The index measures the greenback’s value against a basket of six major trading partners’ currencies. Yet that trend has now gone into reverse, with the dollar falling by 4.4% in July, its worst monthly performance in nearly a decade. It is down by 9% from a mid-March high and has reached a two-year low.
Debasement, debt and dodgy institutions
The dollar’s reversal will have broad implications, says Amrith Ramkumar in The Wall Street Journal. The strong dollar was driven by US interest rates, which were higher than those on offer in Europe or Japan. That encouraged yield-hungry investors to park cash in dollar assets. Yet the US Federal Reserve has now slashed rates to near-zero and quantitative easing has expanded its balance sheet by almost $3trn in five months.
The dollar is still not particularly weak on a historical basis, notes Neil Shearing of Capital Economics, remaining above its ten-year average valuation in trade-weighted terms. Yet something mysterious is afoot. Risk-averse investors have been crowding into safe havens such as bonds and gold, but the dollar, another traditional refuge, has been shunned.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
What’s more, US inflation expectations have risen recently even as stocks remain stuck. The explanation may be that markets are positioning for a “regime shift” in US monetary policy, with a Federal Reserve that “tolerates – or indeed targets – higher inflation”. That makes the greenback a less attractive asset than it once was.
The dollar’s turnaround raises questions that “go to the heart of the global financial system”, say Colby Smith, Eva Szalay and Katie Martin in the Financial Times. Some 88% of deals in the $6.6trn foreign exchange market involve the greenback. Investors are now questioning whether US institutions can withstand a period of intense political polarisation. Donald Trump’s recent suggestion that the election should be delayed has hardly allayed fears of civil strife.
A boon for stocks
American political dysfunction compares unfavourably with Europe, which is taking unprecedented steps towards fiscal union, says Stephen Roach in Project Syndicate. A rising euro has been a significant factor driving the dollar’s recent fall. The macroeconomic picture is also unfavourable for the greenback, with the US running a current account deficit while the eurozone runs a surplus. All this suggests that an “overvalued US dollar is ripe for a sharp devaluation”.
Many will cheer a weaker dollar, says Reshma Kapadia in Barron’s. It could spark a boom in emerging markets by providing cheaper financing costs for local businesses. A falling currency also bodes very well for American stocks because a weaker currency flatters the overseas earnings of US companies when translated into dollar terms. David Kostin of Goldman Sachs notes that a 10% fall in the trade-weighted index boosts S&P 500 earnings per share by 3%.
-
Christmas at Chatsworth: review of The Cavendish Hotel at BaslowMoneyWeek Travel Matthew Partridge gets into the festive spirit at The Cavendish Hotel at Baslow and the Christmas market at Chatsworth
-
Tycoon Truong My Lan on death row over world’s biggest bank fraudProperty tycoon Truong My Lan has been found guilty of a corruption scandal that dwarfs Malaysia’s 1MDB fraud and Sam Bankman-Fried’s crypto scam
-
Rouble hits two-year low against the dollar – what does it mean for Russia's economy?New US sanctions have plunged the rouble to its lowest level since 2022. Why are investors spooked and how will this affect Putin's economy?
-
How Finseta is cashing in on currenciesFinseta has established a foothold in the upper echelons of the market for international payments. Should you invest?
-
Is the US dollar losing its appeal?The US dollar is looking oversold in the short term and is due a bounce. What does it mean for global markets and the upcoming US elections?
-
What does a weak yen mean for Japan's economy?The Japanese yen slumped to a 34-year low. What does a weak yen mean for inflation, interest rates and tourism in Japan?
-
Why you should keep an eye on the US dollar, the most important price in the worldAdvice The US dollar is the most important asset in the world, dictating the prices of vital commodities. Where it goes next will determine the outlook for the global economy says Dominic Frisby.
-
Sterling accelerates its recovery after chancellor’s U-turn on taxesNews The pound has recovered after Kwasi Kwarteng U-turned on abolishing the top rate of income tax. Saloni Sardana explains what's going on..
-
Will Liz Truss as PM mark a turning point for the pound?Analysis The pound is at its lowest since 1985. But a new government often markets a turning point, says Dominic Frisby. Here, he looks at where sterling might go from here.
-
Are we heading for a sterling crisis?News The pound sliding against the dollar and the euro is symbolic of the UK's economic weakness and a sign that overseas investors losing confidence in the country.
