The US dollar is barreling toward a 3.7% loss this month against a basket of six major currencies in what would be it worst monthly performance in a year.
That’s good news for countries relying on imports of commodities, most of which are traded in dollars, as well as nations paying down dollar-denominated debt. But American businesses and consumers could end up paying more for imported goods.
The US Do˙llar Index was on a tear between mid-July and early October, surging by more than 7%, as a slew of positive economic data from the United States fueled expectations the Federal Reserve will keep interest rates high.
Higher interest rates tend to boost the value of a currency by attracting more capital from abroad into the country — as investors anticipate making bigger returns — which increases demand for the currency.
But, in recent weeks, signs that the US economy has finally started to decelerate have convinced investors that the Fed is done hiking borrowing costs and will soon turn to cutting rates.
“I can see two more quarters of US dollar weakness, particularly if it becomes even more clear that the Fed is going to cut interest rates,” Ulrich Leuchtmann, head of foreign exchange research at Commerzbank, told CNN.
Cameron Willard, from the UK capital markets team at Swedish bank Handelsbanken, also expects the dollar to continue to fall steadily over the first half of next year but thinks the greenback will likely reverse course later in the year as geopolitical risks — such as uncertainty around the outcome of several countries’ elections — come to the fore.
In turbulent ti˙mes, investors see the dollar as a safe haven, where their cash will keep its value.
“I struggle to see a longer-term dollar depreciation,” Willard told CNN. “In order for that to happen, you need to have a credible alternative… (The dollar) is still the world’s reserve currency and the safest currency in the world, and I don’t see that changing.”