The Decline of the US Dollar: Is the End of an Era Near?

Nothing lasts forever, not even the power of the greenback

In 2022, The dollar was on the rise, hitting a 20-year high, as global investors sought safety by investing in the main financial haven.

The post-Covid recovery, the war in Ukraine and runaway inflation have made the dollar a symbol of safety in a troubled world. It also helped that the US Federal Reserve was raising interest rates faster than any other major central bank in its fight against inflation, giving investors decent returns for the first time in more than a decade.

But nothing lasts forever, not even the strength of the US dollar. Its popularity peaked last fall and has been on the decline ever since. At the end of September, the euro reached an all-time high. It now trades at $1.11, a 15% jump from 96 cents. The dollar has been further hurt by the rebound in sterling. It recently crossed $1.30, up more than 20% from peak to trough.

This could be the start of what could be a steep decline, with economists at Bloomberg warning that “the dollar’s burst of growth has led buyers to declare it the end of an era.” The Dollar Looks Like It’s Broken – And Worse Is Coming? But who will benefit? The Fed fueled the dollar’s strength last year by raising rates from just 0.25% in February 2022 to 5.25% today, the fastest tightening cycle in four decades. It moved faster and further than central banks rivals, says David Stritch, market and currency analyst at Caxton, a specialist in international transfers. “US interest rates were already at 4% in November 2022, when the Bank of England was already at 3% and the European Central Bank at just 2% “, he added.

With US inflation falling to 3% in June, “the Fed’s work is almost done.” Markets expect one last hike at this week’s Fed meeting, to 5.5%. By spring, it is likely to cut rates instead. Jerome Powell, the president of the institution, has already announced that he “no longer anticipates a recession” at the end of the year in the United States.

With euro zone inflation higher than expected at 5.5% in June, the European Central Bank’s benchmark rate of 3.5% is expected to reach 4%. Investors can now see higher yields outside the US . They are also feeling more emboldened as markets should recover as borrowing costs peak and fall. Both are bad news for the dollar.

A weaker dollar would be a boon for emerging markets, which are saddled with dollar-denominated debt and will see interest payments shrink.

Dollar-denominated commodities will become cheaper for overseas buyers, boosting demand for everything from oil to gold. The precious metal is already up 15 percent over the past year, and there could be more to come. American businesses could also benefit as exports will appear more advantageous.

Richard Flax, chief investment officer at Moneyfarm, argues that currencies such as the euro and yuan may become increasingly relevant to global trade, but the dollar is likely to remain the pre-eminent currency for some time to come. For Stritch, the dollar’s weakness “marks more than likely a return to normalcy”.

2023-07-28 12:15:44
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