Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Strange Fall of the US Dollar

Currencies / US Dollar Aug 10, 2017 - 09:35 AM GMT

By: Dan_Steinbock

Currencies As the exuberant Trump White House has been mugged by realities, US dollar is plunging to record lows.

What a difference a year makes! Last November, US dollar hit its 13-year high. According to the US Dollar Index, which measures the currency against a basket of six other major currencies, the greenback soared to a peak of 103. By early August, US dollar is struggling around less than 93.




Recently, the Index has climbed to 93.5, after a “strong jobs report” raised expectations of an interest rate hike later this year. Yet, job gains in July were driven mainly by low-paying part-time jobs. That will increase the Fed’s interest, but may not result in a rate hike unless wage gains translate into inflation.

Where is the dollar going?

Great expectations, harsh realities

In the fourth quarter of 2016, when the US dollar still seemed near-invisible, it was driven by the triumphant post-election exuberance and the associated bond yields (and the Fed’s anticipated rate hike), and expectations of Trump’s fiscal expansion (infrastructure stimulus).  

Yet, already during the transition, the effort of the US intelligence communities to subdue Trump’s Russia policy began to erode faith in a strong US dollar. While the Fed had to limit rate hikes and prolong the pause between them, Trump’s fiscal ambitions became constrained by the ongoing Mueller Russia investigation. The White House is divided, and so is the Republican House and Senate.

Since December 2016, US dollar has failed to appreciate, despite three hikes by the Federal Reserve. Meanwhile, US consumer prices have plunged from 2.6% in January back to 1.6% today.

Neither Trump nor the US explains everything about the dollar’s fall. The Dollar Index is sensitive to the fluctuations of its largest constituent currencies comprise it, particularly the euro (58% weight). Some dollar losses could be attributed to the euro’s strengthening, which began with Macron’s election triumph in France that eased concerns about the EU break-up. And as the European Central Bank (ECB) gave an upbeat EU growth and inflation outlook, euro’s rise continued.

But while Chancellor Merkel’s expected election win in the fall will support the euro, Macron’s approval rating is falling, German carmakers face rising challenges, Italian elections and UK Brexit loom ahead, along with the ECB’s exit from quantitative easing and possible rate hikes in 2018.

Short-term resilience, longer-term erosion

In the coming months, US dollar could recover if the White House can get its act together and the Republican lawmakers come up with some legislative success – and if the Fed can execute new hikes without adverse effects.

In reality, risks continue to prevail. Instead of fostering growth, the White House is about to ignite trade friction with China regarding intellectual property rights. Trump has already alienated his European NATO partners by declaring US steel imports a “national security issue,” which will cause economic damage to Germany, Canada and other major steel importers in America.

If trade friction will spread from steel to aluminum, semiconductors and other areas, world trade is likely to take a new hit, as US “trade defenses” will unleash waves of retaliation from Europe to Asia. In turn, Washington’s Russia sanctions will intensify a new Cold War and has already resulted in Russian retaliation. For months, EU leaders have warned Washington about such sanctions.

In this odd status quo, it is easy to be distracted by short-term fluctuations. Yet, if one takes a perspective of three-to-four decades, the evolution of the US dollar seems continuous.  Since the 1970s and the eclipse of the gold standard, three periods of dollar surges have been followed by associated periods of decline.

Despite the continued international strength of the US dollar, each of these periods reflects a steady relative erosion of the dollar, from its all-time high of 165 in 1985 to barely 120 in the early 2000s and to 103 last fall (see the black trend line in the US Dollar Index Figure). 

In the coming months, US dollar could still prove resilient, except for uncertainty and volatility, especially if the Trump administration finds itself cornered. In the longer-term, US dollar’s recent decline is consistent with its longstanding relative erosion.

Dr Steinbock is the founder of the Difference Group and has served as the research director at the India, China, and America Institute (USA) and a visiting fellow at the Shanghai Institutes for International Studies (China) and the EU Center (Singapore). For more information, see http://www.differencegroup.net/

The original, slightly shorter version was published by South China Morning Post on February 28, 2017

© 2017 Copyright Dan Steinbock - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in