In August 2020, the US Reserve agreed to weaken the USD further as well as increase employment, confirming a tolerance for higher inflation.
Analysts believe that interest rates will remain low for some years.
Fiscal restraint, low consumer confidence and the equity bull market means the USD is likely to remain vulnerable in global markets.
Some believe only fiscal stimulus or global equity correction will trigger a return of the USD as a safe-haven currency, as it has always been known as.
Although others 7 June 2021 report see cryptocurrencies as a way out, the USD still reigns as the world’s reserve currency.
“… The US Dollar Index (greenback versus Euro, Yen and other global currencies) was down by more than 7% in 2021.
Fears of inflation are affecting the USD with expectations that interest rates may remain near zero. Both inflation and historically low interest rates lower the value of a currency over time.
A weaker dollar is bad news for Americans travelling abroad and consumers buying imported goods.
The slump is one reason that prices for commodities and consumer goods have surged lately.
Energy costs are stoking inflation
Investors in major blue-chip multinationals are licking their chops. Companies such as Apple (AAPL), Microsoft (MSFT) and Coca-Cola (KO) that generate big overseas revenue should get a boost.
That’s because their products are more affordable to foreign buyers. Plus the value of sales from international transactions goes up when translated back into USD.
So it’s no wonder that many investors have been globetrotting and scooping up shares of big US firms that have a significant presence in Europe and Asia.
The S&P 500 (SPY) is up about 10% in the past three months compared to just a 4% gain for the Russell 2000 (RUT), an index of smaller companies that tend to do more business in the US.
Companies in emerging markets, especially China, stand to gain from a weak dollar too.
The SPDR Portfolio Emerging Markets ETF (SPEM), is up about 7% in the past three months.
Trend of Reserve to weaken USD likely to continue
Strategists at the BlackRock Investment Institute said in a report Monday that the “expectation of a flat to weaker U.S. dollar” is a reason why they are bullish on emerging markets stocks.
Several other experts have the opinion that the weak dollar trend is likely to continue, mainly because the Fed has shown little willingness to raise rates anytime soon.
“The market still views the Fed as the ‘most dovish’ global central bank, and as long as that’s the case, the dollar will have a hard time rallying much,” said Tom Essaye, president of Sevens Report Research.
China’s stronger currency means difficult choices for Beijing
May jobs report was good but showed that fewer jobs were added than expected. This may give Fed chair Jerome Powell reason to the argue that rates need to stay low for longer.
It “brought a shock for the dollar bulls hoping for a strong number” said a chief market analyst at AvaTrade.
April job numbers were a bigger disappointment. Powell doesn’t want to go down in history as being the Fed chair who took away stimulus too soon.
It seems that he’d rather let inflation pick up a little steam, even if it hurts the dollar.
“There is a big employment gap left by the pandemic, which the Fed is committed to filling,” said Kit Juckes.
“Policy remains easy, for now, and that has delivered a weaker dollar.”
World Economic Outlook
A Survey by the IMF staff usually published twice a year. It presents IMF staff economists’ analyses of global economic developments during the near and medium term.
