Why the U.S. Dollar Is Losing Ground Against Major Currencies

On the foreign exchange markets, the value of the dollar plummeted significantly against major world currencies last week, while the euro surged, as investors believe the interest rate hiking cycle in the United States is over.

The U.S. Dollar Index, which tracks the value of the U.S. dollar against six of the world’s most important currencies, fell by 1.4 percent last week to 105.07 points, marking its lowest level in the past six weeks.

Simultaneously, the dollar dropped by 1.5 percent against the euro, pushing the euro’s value to $1.0730. The dollar also weakened against the Japanese yen, by 0.2 percent, settling at 149.35 yen.

The decline of the dollar can be attributed to the belief held by investors that the interest rate hiking cycle by the U.S. central bank, the Federal Reserve, is coming to a close.

At the mid-week meeting, the Federal Reserve officials decided to leave interest rates unchanged, maintaining them within a range of 5.25 to 5.50 percent.

This marked the second consecutive meeting where the Federal Reserve chose not to increase interest rates after raising them for 11 consecutive sessions due to high inflation.

While Federal Reserve Chairman Jerome Powell kept the door open for further rate hikes during a press conference, most analysts believe it’s unlikely to happen. This perspective is based on Powell’s remarks regarding how the rise in bond yields has influenced the economy.

Additionally, the labor market has shown some signs of weakening, leading to a decrease in inflationary pressures.

On Friday, it was announced that the number of employed individuals in the United States increased by 150,000 in October, which was less than expected and significantly lower than the nearly 300,000 jobs added the previous month.

In light of these data, investors are almost certain that the Federal Reserve will not increase interest rates at its December session. In the money market, it’s estimated that there is a 90 percent chance that the central bank will leave interest rates unchanged in December.

As a result of all these developments, yields on U.S. government bonds decreased, leading to a decline in the value of the dollar.

Simultaneously, the price of the euro against the dollar marked its most significant weekly gain since July, despite the belief that the European Central Bank is unlikely to raise interest rates further due to a gradual decrease in inflation in the Eurozone.

The weakening of the U.S. dollar against other major world currencies has significant implications for the global economy. Here are some of the key effects:

As the dollar weakens, import prices in the United States tend to increase. A weaker dollar means it takes more dollars to purchase the same amount of goods or services priced in other currencies. This can lead to inflationary pressures in the U.S. economy, affecting consumer prices and potentially leading to higher living costs.

While a weaker dollar may lead to higher import prices, it can also enhance the competitiveness of U.S. exports. U.S. goods and services become more affordable for foreign buyers, potentially boosting American exports and supporting economic growth.

Changes in the value of the dollar can influence international investment flows. A weakening dollar might encourage foreign investors to seek higher returns in U.S. assets, such as stocks and bonds. This can have implications for asset prices and financial markets.

Exchange rate movements can affect international trade dynamics. A stronger euro, for example, can make European goods and services more expensive for foreign buyers, potentially impacting the export-driven economies of European nations.

Commodity prices, such as oil and gold, are often inversely correlated with the value of the dollar. A weaker dollar typically leads to higher commodity prices, which can impact industries reliant on these resources, such as energy and manufacturing.

Countries and corporations that have borrowed in U.S. dollars may face challenges if their domestic currencies weaken against the dollar. The cost of servicing dollar-denominated debt can rise, potentially leading to financial difficulties.

The future trajectory of the U.S. dollar remains uncertain. Much will depend on the Federal Reserve’s monetary policy decisions, economic indicators, and developments in financial markets.

Furthermore, global factors, such as geopolitical events and central bank policies in other countries, can influence the dollar’s performance.

Investors will continue to closely monitor economic data, central bank communications, and geopolitical events to gauge the potential direction of the U.S. dollar and its implications for the global economy.

The dollar’s recent decline against major world currencies is primarily driven by investors’ expectations of a paused interest rate hiking cycle in the United States. This has implications for import prices, export competitiveness, investment flows, global trade, commodity prices, and foreign debt.

The future of the dollar will depend on a range of factors, making it a focal point for financial markets and policymakers alike.

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