Declining U.S. Inflation Fuels Dollar’s Fall, Boosts Global Risk Assets

Cooling U.S. Inflation Accelerates Decline in Dollar, Boosting Risk Assets Worldwide

NEW YORK, July 14 (Reuters) – The decline in the U.S. dollar is gaining momentum as cooling U.S. inflation data suggests that the Federal Reserve is nearing the end of its interest rate-hiking cycle. The dollar is down nearly 13% against a basket of currencies from last year’s two-decade high and is currently at its lowest level in 15 months.

The weakening dollar is expected to benefit a wide range of assets globally. A weaker currency makes exports more competitive for U.S. companies abroad and makes it cheaper for multinationals to convert foreign profits back into dollars. The U.S. technology sector, which generates just over 50% of its revenues overseas, is expected to benefit from the weaker dollar.

In addition, raw materials priced in dollars become more affordable to foreign buyers when the dollar declines. The S&P/Goldman Sachs Commodity Index is up 4.6% this month, on track for its best month since October. Emerging markets also stand to benefit as a falling U.S. currency makes debt denominated in dollars easier to service. The MSCI International Emerging Market Currency Index is up 2.4% this year.

“The weaker dollar and its underlying driver, weaker inflation, is a balm for everything, especially for assets outside the U.S.,” said Alvise Marino, foreign exchange strategist at Credit Suisse.

The decline in the dollar has coincided with easing U.S. Treasury yields, which has boosted a wide range of other currencies, including the Japanese yen and the Mexican peso. The dollar’s decline has also made foreign exchange strategies such as the dollar-funded carry trade profitable. An investor selling dollars and buying the Colombian peso would have collected 25% year-to-date, while the Polish zloty has yielded 13%.

However, being bearish on the dollar does come with risks. A potential rebound in U.S. inflation could lead to more hawkishness from the Federal Reserve and unwind many of the anti-dollar trades that have been successful this year. Despite cooling inflation, the U.S. economy has remained resilient compared to other countries, and few believe that the Fed will cut rates anytime soon, which could limit the dollar’s near-term downside.

Nevertheless, some experts believe that the dollar’s long-term momentum is likely to weaken further. Helen Given, FX trader at Monex USA, believes that the Fed will wrap up its rate-hiking cycle before most other central banks, which will sap the dollar’s long-term strength. “Looking six months out, it’s likely the dollar will be even weaker than it is today,” she said.

The decline in the dollar may also provide relief to countries like Japan and Sweden, as it removes the urgency for them to support their falling currencies. However, continued strength in the yen could lead to investors unwinding their bearish positions, pushing the currency higher.

In conclusion, the cooling U.S. inflation is accelerating the decline in the dollar, benefiting a wide range of assets globally. While there are risks associated with being bearish on the dollar, experts believe that the long-term outlook for the currency remains bleak.

Reporting by Saqib Iqbal Ahmed; Additional reporting by Dhara Ranasinghe and Ira Iosebashvili; Writing by Ira Iosebashvili; Editing by Leslie Adler

What factors could potentially reverse the decline in the dollar and impact risk assets worldwide

Ields, which has further boosted risk assets worldwide. Lower yields on U.S. Treasuries decrease the attractiveness of the dollar, making other assets more appealing.

Investors have been closely watching U.S. inflation data for hints on the future path of interest rates. Recent data showing a slowdown in inflation has heightened expectations that the Federal Reserve may pause its rate-hiking campaign sooner than anticipated.

The impact of the declining dollar and lower Treasury yields has been felt across global markets. Stocks have rallied, with the MSCI All-Country World Index up nearly 1% this month. Emerging market stocks have also performed well, with the MSCI Emerging Markets Index up over 7% this year.

Commodity prices have seen a boost as well, with oil and copper prices rising. A weaker dollar typically leads to higher commodity prices as it makes them cheaper for international buyers.

However, some experts caution that the decline in the dollar may not be sustainable in the long term. A potential trade war between the U.S. and its trading partners could lead to a stronger dollar as investors seek safe-haven assets. Additionally, if inflation picks up again, the Federal Reserve may resume its rate-hiking cycle, which could strengthen the dollar.

For now, though, the declining dollar has provided a boost to risk assets worldwide, and investors are reaping the benefits.