The weakening dollar is having rippling effects around the world

See The Dollar Swoon Lifting U.S. Stocks Is Poised to Continue: Bets on the greenback’s weakness is increasing—a result that would benefit commodities, emerging markets by Ira Iosebashvili, Chelsey Dulaney and Riva Gold of The WSJ. Excerpts:

"weighed down by scant inflation and doubts whether the Federal Reserve will raise rates anytime soon."

"the WSJ Dollar Index remained down roughly 7% since the start of the year and has declined for five straight months."

"the index, . . . measures the dollar against a basket of 16 currencies"

"with gridlock in Washington putting those policies [tax cuts and infrastructure spending] in doubt—or at least on hold—many believe the dollar stands to fall further."

"A weaker dollar is typically good for shares of U.S. exporters, making their products cheaper for overseas buyers.

S&P 500 companies got about 43% of their sales abroad in 2016"

"A falling dollar helps commodities, too, which are priced in the U.S. currency and become more affordable to foreign investors when the dollar declines."

"Signs that central banks plan to wind down the easy-money policies that have helped boost risky investments hurt assets in developing countries last month, when flows into emerging market funds slowed or even turned negative.

But those fund flows have picked up again recently, analysts say, in part because of the weakening dollar. A weaker U.S. currency makes it easier for these countries to pay back their dollar-denominated debt."

See Trade Weighted U.S. Dollar Index: Major Currencies (DTWEXM) from the St. Louis Federal Reserve Bank. The dollar finished 2016 at 95.76 and was at 88.53 on Aug. 4.



Related posts:

Why Is The Dollar Down 5.6% This Year?

Why Did The Value Of The Dollar Rise More Than 20% From July 2014 To March 2015?

Why Is The Dollar Down 5.6% This Year?

Dollar Gets Squeezed From All Sides: Greenback is down 5.6% this year, its worst two-quarter decline since 2011, as investors see more growth overseas by Chelsey Dulaney of the WSJ.

See also a post from a few months ago Why Did The Value Of The Dollar Rise More Than 20% From July 2014 To March 2015? That has a link to a timeline chart showing how the dollar has done against other currencies.

Now excerpts from the WSJ article. Bottom line seems to be that other countries have been growing faster recently, so the demand for their currency is up, raising those values while the dollar falls.

"The dollar suffered through its worst stretch in six years during the first half of 2017, as investors turned more confident that economic recoveries around the world are gaining on or surpassing growth in the U.S.

The currency lost 1% last week against a basket of major peers tracked by The Wall Street Journal, bringing its decline for the year to 5.6%. That is the dollar’s largest two-quarter percentage decline since 2011.

The dollar has come under fresh pressure after central-bank officials in Europe and Canada last week offered some of their strongest signals yet that they could soon begin winding down monetary policy measures designed to spur economic growth.

Investors, viewing these statements as a sign of strength and a possible portent of higher interest rates in those countries, rushed to buy the currencies. The euro soared to its highest level against the dollar in more than a year, while sterling and the Canadian dollar both rallied more than 2%."

"Few had expected such a turnabout even six months ago. Investors had driven the dollar to a 14-year-high after the November U.S. presidential election on hopes that Donald Trump’s plans for a tax overhaul, deregulation and fiscal stimulus would accelerate growth while the Federal Reserve also raised interest rates.

Instead, the Trump administration’s plans have repeatedly hit political roadblocks while U.S. growth, employment and inflation data have begun to soften."

"The dollar has come under fresh pressure after central-bank officials in Europe and Canada last week offered some of their strongest signals yet that they could soon begin winding down monetary policy measures designed to spur economic growth."

"Investors, viewing these statements as a sign of strength and a possible portent of higher interest rates in those countries, rushed to buy the currencies. The euro soared to its highest level against the dollar in more than a year, while sterling and the Canadian dollar both rallied more than 2%."

"Even the Federal Reserve continuing to raise U.S. interest rates—one of the few positives for the dollar this year—is no sure thing. Some Fed officials recently have expressed concern about pushing up rates amid weakening inflation. The latest was Federal Reserve Bank of St. Louis President James Bullard, who said on Thursday that he doesn’t support raising short-term interest rates again this year."

Why Did The Value Of The Dollar Rise More Than 20% From July 2014 To March 2015?

On June 30, 2014 , the Trade Weighted U.S. Dollar Index: Major Currencies (DTWEXM) was 75.7 (the index starts in 1973 at 100, so the dollar was lower in value compared to other major currencies in 2014 than it was in 1973).

See Trade Weighted U.S. Dollar Index: Major Currencies (DTWEXM) from the St. Louis Federal Reserve Bank.

But by March 16, 2015, it was at 93.1, just about a 23% increase in value.

Why did the dollar rise? Here is what The Economist magazine said:

"The principal reasons for the greenback’s rapid strengthening are simple to grasp. With Europe and Japan stuck in the doldrums, and China and other emerging markets slowing, America’s economy looks relatively strong. The IMF expects it to grow by 3.6% this year. The Federal Reserve has already begun to tighten monetary policy, by stopping its programme of asset purchases, and is now preparing the ground to go further. This week the Fed altered the wording it uses to describe its plans (see article), giving itself room to raise interest rates later this year—the first rise since 2006. With American monetary policy tightening, and other central banks still loosening, investors can make higher returns from dollar-denominated assets. In capital floods, and up the dollar goes."

See Mismatch point: The rise of the dollar will punish borrowers in emerging markets.

Here is another view from Andrew Hecht. He is an international commodity trader, an options expert and analyst.

"There are many reasons that the dollar has appreciated over recent months. The U.S. economy is still the largest in the world. Despite demographics, the U.S. remains the strongest economic nation in the world. The U.S. remains a powerful nation even though less than five percent of the world's population live within U.S. borders. The dollar is the reserve currency of the world. Many other nations hold dollars as a key part of their reserves due to the political and economic stability in the United States. Dollar strength has been the result of moderate growth in the U.S. economy. While European growth remains lethargic, the nation that experienced the highest degree of growth in recent years, China, has seen its growth rate slow. The Chinese economic has shifted from heavy manufacturing to a consumer based economy. As the size of the Chinese economy swells, it becomes harder to grow on a percentage basis as it has in the past.

Think of it this way, it is easier to make a seven percent return on one million dollars than it is to make a commensurate return on one trillion dollars. The sheer size of the Chinese economy makes the percentage growth rate seen in years past almost impossible to sustain. Therefore, Chinese economic growth has slowed on a percentage basis.

Relative strength of the U.S. economy, when compared to those of Europe and China, is a positive factor for the dollar.

A bear market in commodity prices has also been supportive for the dollar. The U.S. is a major consumer of raw materials and lower prices amount to stimulus for the American economy. At the same time, the currencies of nations that depend on commodity revenues have suffered because of lower prices. Canada, Australia, Brazil, Russia, South Africa as well as other commodity producing nations have seen their currency values depreciate alongside raw material prices.

Another positive influence for the dollar is the relative rate of interest paid on the U.S. currency when compared to other currencies. For the first time in nine years, the U.S. central bank raised short-term interest rates in the United States in December 2015. The Federal Reserve also stated their intention that rates will continue to head higher in the months and years ahead. Short-term interest rates in the U.S. went to zero in the aftermath of the housing and global financial crisis in 2008. Growth in the U.S. economy no longer supports such accommodative monetary policy. As the dollar has offered the opportunity for capital growth, in terms of its appreciation versus other currencies since May 2014, higher interest rates add additional support in that they increase the yield on the currency for holders."