The US Dollar Is Falling, And It Won’t Stop Falling Soon

The mighty US dollar is taking a beating, with the dollar index down by 0.14% last Monday to 90.11.  The Dollar Index (USDX) measures the value of the dollar relative to the value of currencies used by the country’s significant trading partners.

RELATED: The Dollar Index Is Falling, You Can Thank the Fed for That

The US Dollar Is Free Falling

 If the trend continues, the dollar threatens to eclipse the previous 2021 low of 89.93 it set earlier this January.  In fact, the decline from the past few days already erased the US dollar’s gains it made this year.

The index peaked in April at 93.44, but now, almost all gains made in February and March as the economy roared disappeared. 

The latest blow came after the US Bureau of Labor Statistics released its April jobs report. Instead of the targeted 1 million new non-farm payroll jobs, the US only managed to generate 266,000.

Consequently, this realization knocked US confidence down a peg. With the decline, many analysts believe the slide will continue.

In addition, recovering economies around the world will draw investment away from the US. At the same time, the Federal Reserve is keeping interest rates at ultra low levels. 

Terrible Numbers In Jobs Report

Ultimately, the terrible employment gains in April triggered many investors. They realized that the famed US economic recovery is not a finished product but rather a work in progress.

As a result, inventors rallied to speculative assets such as stocks and a weaker dollar, in large part because investors now expect the Fed to keep interest rates low for longer.

This is according to John Hardy, head of FX strategy at Saxo Bank. Lower rates typically weigh on a currency, as they make investments in that country less attractive.

“That's the knee-jerk reaction in the modern era of maximum central bank and now fiscal support at every misstep for the economy,” he said.

Meanwhile, strong economic recovery programs in other countries can also weigh heavily on the greenback. Analysts from JPMorgan said that many countries will focus on rebuilding their economies, leading to a “temporary time-out for US exceptionalism” that can affect the US dollar. As a result, JPMorgan recommended to clients that they reduce their exposure to the dollar.

Wednesday’s CPI Inflation Data

Traders will not focus on the upcoming consumer price index inflation data, which comes out Wednesday. Analysts expect the CPI to rise to 3.6% versus last year.

A sharp increase in inflation can force the Federal Reserve to raise interest rates. In turn, this will boost the US dollar’s value. 

However, the Fed may not even focus on the US dollar at this point. George Saravelos, Deutsche Bank's global head of FX research, thinks the Fed’s sights are trained at unemployment figures.

The Fed believes that the rise in inflation is transitory. “The Fed is being driven by America's severely under-performing ‘labor gap', not the market's focus on the ‘output gap'.

Last week's payrolls report should prove a catalyst for the market to come to terms with this dynamic and opens the door to further dollar weakness,” Saravelos said.

Watch the Bloomberg Markets and Finance video “Breaking Down the Huge Miss in the U.S. Jobs Report”:

 Loading ...

Will the US dollar continue to drop this year? Or, do you see signs of the dollar recovering?

Let us know what you think about the recent decline of the US dollar. Share your thoughts in the comments section below.