(Reuters) – A rapid decline in the US dollar is reverberating around the world, adding fuel to a rebound in global momentum that has fueled prices for everything from tech stocks to gold.
FILE PHOTO: Four thousand US dollars are counted by a bank counting currency at a bank in Westminster, Colorado, November 3, 2009. REUTERS / Rick Wilking / File Photo / File Photo
The US Dollar = USD Index, which measures the dollar against six other major currencies, is down about 9% from its March highs and is on track for its worst month since 2011, partly pressured by expectations that States The United States will take a bigger hit on growth than other coronavirus pandemic economies.
Due to the central role of the dollar in the global economy, a sustained sale in the US currency could fuel a broad rebound in the market driven by expectations of continued economic stimulus from the world’s central banks and governments.
At the same time, further weakness in the dollar would likely be an unpleasant development for economies like Europe and Japan, as their own rising currencies threaten to weigh on growth and efforts to spark inflation.
“The weaker dollar is almost becoming a self-fulfilling prophecy, with gains for risky assets seeing the dollar weaken further, fueling further gains,” said Michael Brown, senior analyst at payments firm Caxton.
The dollar has fallen about 3% so far this year, after rising in each of the past two years. The dollar slipped nearly 10% in 2017.
Chart: The sinking dollar lifts all ships – here
A weaker dollar makes American exports more competitive abroad and helps American multinational companies by making it cheaper for them to convert profits back into their local currency. That is potentially good news for a rally in US stocks that has slowed in recent weeks after being close to all-time highs.
Historically, the benchmark S&P 500 index has averaged 2.6% in months when the dollar is moving sharply lower, and technology and energy stocks are doing better, analysts at Goldman Sachs said in a recent report.
A 10% drop in the value of the dollar against a basket of trade-weighted currencies would boost 2020 earnings per share by approximately 3%, Goldman said. Goldman analysts expect the dollar to drop another 5% in the next 12 months.
But a weaker dollar may be of little political benefit in the short term for President Donald Trump, who is seeking a second term in the November election and has complained that the multi-year recovery of the currency hurts U.S. manufacturers.
The weak dollar would take at least a year to reach the manufacturing sector, “too long to have a favorable impact on the president in the November election,” said Alan Ruskin, chief international strategist at Deutsche Bank.
Chart: Trump and the US Dollar – here
Other assets are already benefiting from the falling dollar. Gold, which like many commodities is priced in the US currency and becomes more affordable for foreign buyers when the dollar falls, is near its all-time high, part of a recovery that has boosted the S&P / Goldman Sachs commodity index. 34% higher SPGSCI since the end of March, as of Monday.
Developing countries are also likely to encourage a weaker dollar as it is cheaper for them to pay off debt denominated in the US currency.
Emerging market currencies like the Brazilian real BRL = and the South African rand ZAR = have been screaming back in recent weeks, while the MSCI Emerging Markets .dMIEF00000PUS index, which measures stock performance, rose 40% since its March lows.
“It has been difficult to argue for the dollar, in the short or long term,” said Juan Pérez, currency trader at Tempus Inc. The weaker dollar will likely benefit “emerging market players and holders of real physical material,” he said. . .
A reversal in risk appetite could push investors back to the dollar, seen by many as the final refuge.
Evidence of stronger-than-expected US growth could also be a boost for the currency. Investors will watch for the Federal Reserve’s policy statement at the close of its two-day meeting on Wednesday and the monthly job numbers in the United States next week to see if a coronavirus pandemic has slowed a nascent economic recovery.
Still, many believe the scales have leaned toward the US dollar.
“We are comfortable with the idea that the dollar may increase in the short term if volatility in risky assets increases,” analysts at Oxford Economics wrote. “However, we see little basis for a rise to the March highs.”
Reports by Ira Iosebashvili and Saqib Iqbal Ahmed; Editing by Leslie Adler
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