Declining U.S. Inflation Accelerates Dollar's Slide

The weakening U.S. dollar, fueled by cooling inflation, is having a far-reaching impact on risky assets worldwide. The dollar has witnessed a significant decline of nearly 13% against a basket of currencies since reaching a two-decade high last year, reaching its lowest point in 15 months. This descent has gained momentum following the release of weaker-than-anticipated U.S. inflation data on Wednesday, reinforcing the belief that the Federal Reserve is approaching the end of its cycle of interest rate hikes.

Given the dollar's central role in the global financial system, numerous assets stand to gain if its downward trajectory persists.

  • A weaker dollar can prove advantageous for certain U.S. companies, as it enhances the competitiveness of exports abroad and lowers the cost of converting foreign profits back into dollars for multinational corporations.
  • According to an analysis conducted by Bespoke Investment Group on the technology sector, which includes leading growth companies propelling market gains this year, generates slightly over 50% of its revenues from overseas.
  • Furthermore, the depreciation of the dollar makes dollar-denominated raw materials more affordable for foreign buyers. Consequently, the S&P/Goldman Sachs Commodity Index has experienced a 4.6% increase this month, poised to deliver its best performance since October.
  • Emerging markets also stand to benefit from a falling U.S. currency, as it eases the servicing of dollar-denominated debt. As evidence, the MSCI International Emerging Market Currency Index has risen by 2.4% this year.
  • Alvise Marino, foreign exchange strategist at Credit Suisse, remarked that for markets, the weaker dollar and its underlying driver, weaker inflation, is a balm for everything, especially for assets outside the U.S.

The decline in the greenback aligns with the recent easing of U.S. Treasury yields, diminishing the appeal of the dollar while bolstering various other currencies, from the Japanese yen to the Mexican peso.

Relief For Many Countries

In the realm of monetary policy, the dollar's depreciation brings relief to certain countries, removing the urgency to support their own depreciating currencies. One such example is Japan, where the dollar has plummeted by 3% against the yen this week, marking the largest weekly decline against the Japanese currency since January. Weakness in the yen has posed challenges for Japan's import-dependent economy and has raised expectations of market interventions to support its currency, as occurred last year for the first time since 1998.

  • Societe Generale currency strategist Kenneth Broux emphasized that if the yen maintains its strength, investors may unwind their substantial bearish positions that have accumulated against the currency in recent months, leading to further appreciation.
  • Traders are also keeping a close eye on Sweden's central bank, given the weakness of the Swedish krona. However, this week has seen the dollar decline by almost 6% against the krona, representing its most substantial weekly drop since November.

Betting Against The U.S. Dollar, A Risky Trade?

Naturally, adopting a bearish stance on the dollar carries its own risks. One such risk is the potential resurgence of U.S. inflation, which could fuel expectations of a more hawkish Federal Reserve and unravel many of the anti-dollar trades that have thrived this year.

  • While inflation has tempered, the U.S. economy has remained resilient relative to other nations, and few believe the Federal Reserve will reduce rates in the near future, potentially limiting the dollar's downside in the short term.
  • Nonetheless, Helen Given, FX trader at Monex USA, believes the Federal Reserve will conclude its cycle of interest rate hikes before most other central banks, eroding the dollar's long-term momentum.


Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products. Please note that the writer of this article is not registered as a financial advisor.


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