Declining inflation in the US is accelerating the dollar’s decline, and risky assets around the world are expected to benefit from this.
The dollar fell nearly 13 percent against a basket of major currencies from its highest level in twenty years, which it recorded last year, and reached its lowest level in 15 months.
US data released on Wednesday showed that inflation slowed more than expected, accelerating the dollar’s decline and reinforcing expectations that the Federal Reserve (the US central bank) is about to end the cycle of raising interest rates.
And because the dollar is a vital component of the global financial system, a wide range of assets will benefit if it continues to decline.
A weaker dollar could be a boon for some US companies because a lower currency makes exports more competitive abroad and makes it cheaper for multinationals to convert profits abroad into dollars.
An analysis by Bespoke Investment Group of Russell 1000 companies showed that just over 50 percent of US technology sector revenues come from abroad. This sector includes some of the big growth companies that have led the markets rally this year.
Raw materials, which are priced in dollars, become affordable for foreign buyers when the US currency depreciates. The Standard & Poor’s and Goldman Sachs commodities index rose 4.6 percent this month, and is on course for its best monthly performance since October.
Emerging markets also benefit because a lower US currency makes it easier to repay dollar-denominated debt. The MSCI emerging market currency index has risen 2.4 percent this year.
“For the markets, the dollar’s decline and the reason behind it, which is the decline in inflation, facilitates everything, especially for assets outside the United States,” Alves Marino, foreign exchange analyst at Credit Suisse, told Reuters.
VI Markets: The way for the dollar is open for further gains
The dollar fell as US Treasury yields fell in recent days, reducing the attractiveness of the US currency and boosting a large number of other currencies ranging from the Japanese yen to the Mexican peso.
“That sound you’re hearing is cracking technical levels in the foreign exchange markets,” said Carl Chamota, senior market analyst at Corbyn. “.
A continued decline in the dollar may increase the profits of foreign exchange strategies such as dollar-funded carry trades, which involve selling dollars to purchase a higher-yielding currency, allowing the investor to cash in the difference.
The dollar’s decline has made the strategy already profitable this year. Data from Corbay showed that the investor who sold the dollar and bought the Colombian peso has accumulated 25 percent year-to-date, while the Polish zloty has made a return of 13 percent.
In terms of monetary policy, the dollar’s decline may bring relief to some countries because it removes the urgent need to support their falling currencies.
Among these countries is Japan. The dollar has fallen 3 percent against the yen this week, and is set to post its biggest weekly decline against the Japanese currency since January.
The yen’s decline poses a problem for Japan’s import-dependent economy. And increased expectations that Japan will intervene again in the markets to support its currency after it did so last year for the first time since 1998.
The risks of a weak dollar
Of course, a lower dollar has its own risks, one of which is a potential increase in US inflation which raises bets on further monetary tightening and dampens many of the anti-dollar trades that have thrived this year.
Although inflation has slowed, the US economy has remained resilient compared to other countries. A few experts believe that the Federal Reserve will cut interest rates soon, which may limit the dollar’s decline in the near term.
Share of major currencies in world reserves
2023-07-14 08:44:01
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