econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 10 August 2017

The Strange Fall Of The Dollar

Written by , Difference Group

As the exuberant Trump White House has been mugged by realities, the US dollar is plunging at a record rate.

worn.dollar


Please share this article - Go to very top of page, right hand side, for social media buttons.


What a difference a year makes! Last November, the US dollar hit a 13-year high. According to the US Dollar Index, which measures the currency against a basket of six other major currencies, the greenback soared to a peak of 103. By early August, US dollar is struggling around a level less than 93.

Recently, the Index has climbed to 93.5, after a “strong jobs report" raised expectations of an interest rate hike later this year. Yet, job gains in July were driven mainly by low-paying part-time jobs. That will increase the Fed’s interest, but may not result in a rate hike unless wage gains translate into inflation.

Where is the dollar going?

Great expectations, harsh realities

In the fourth quarter of 2016, when the US dollar still seemed near-invisible, it was driven by the triumphant post-election exuberance and the associated bond yields (and the Fed’s anticipated rate hike), and expectations of Trump’s fiscal expansion (infrastructure stimulus).


Trump’s fiscal ambitions became constrained by the ongoing Mueller Russia investigation.


Yet, already during the transition, the effort of the US intelligence communities to subdue Trump’s Russia policy began to erode faith in a strong US dollar. While the Fed had to limit rate hikes and prolong the pause between them, Trump’s fiscal ambitions became constrained by the ongoing Mueller Russia investigation. The White House is divided, and so is the Republican House and Senate.

Since December 2016, US dollar has failed to appreciate, despite three hikes by the Federal Reserve. Meanwhile, US consumer prices increases have plunged from 2.6% in January back to 1.6% today.

Neither Trump nor the US explains everything about the dollar’s fall. The Dollar Index is sensitive to the fluctuations of its largest constituent currencies comprise it, particularly the euro (58% weight). Some dollar losses could be attributed to the euro’s strengthening, which began with Macron’s election triumph in France that eased concerns about the EU break-up. And as the European Central Bank (ECB) gave an upbeat EU growth and inflation outlook, the euro’s rise continued.


the White House is about to ignite trade friction with China regarding intellectual property rights.


But while Chancellor Merkel’s expected election win in the fall will support the euro, Macron’s approval rating is falling, German carmakers face rising challenges, Italian elections and UK Brexit loom ahead, along with the ECB’s exit from quantitative easing and possible rate hikes in 2018.

Short-term resilience, longer-term erosion

In the coming months, US dollar could recover if the White House can get its act together and the Republican lawmakers come up with some legislative success - and if the Fed can execute new hikes without adverse effects.


Trump has already alienated his European NATO partners by declaring US steel imports a “national security issue"


In reality, risks continue to prevail. Instead of fostering growth, the White House is about to ignite trade friction with China regarding intellectual property rights. Trump has already alienated his European NATO partners by declaring US steel imports a “national security issue", which will cause economic damage to Germany, Canada and other major steel import sources for America.

If trade friction were to spread from steel to aluminum, semiconductors and other areas, world trade is likely to take a new hit, as US “trade defenses" will unleash waves of retaliation from Europe to Asia. In turn, Washington’s Russia sanctions will intensify a new Cold War and has already resulted in Russian retaliation. For months, EU leaders have warned Washington about such sanctions.


If trade friction were to spread from steel to aluminum, semiconductors and other areas, world trade is likely to take a new hit


In this odd status quo, it is easy to be distracted by short-term fluctuations. Yet, if one takes a perspective of three-to-four decades, the evolution of the US dollar seems continuous. Since the 1970s and the eclipse of the gold standard, three periods of dollar surges have been followed by associated periods of decline.

Despite the continued international strength of the US dollar, each of these periods reflects a steady relative erosion of the dollar, from its all-time high of 165 in 1985 to barely 120 in the early 2000s and to 103 last fall .

US Dollar Index, 1970-2017dollar.index.1970.2017

This article was adapted from a commentary released by Shanghai Daily 10 August 2017.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Opinion Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted. You can also comment using Facebook directly using he comment block below.




Econintersect Opinion








search_box
Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.







Keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government





























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2017 Econintersect LLC - all rights reserved