Markets

3 Things To Know About Why U.S. Dollar Is Crashing And Bigger Trends

Written by Ann Brown

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3 Things To Know About Why The U.S. Dollar Is Crashing And Whether A Bigger Trend Is In Place Photo: Photo by whoislimos on Unsplash

Despite rising from a two-and-a-half-year low, the dollar just posted its worst week in a month after investors shrugged off a weaker-than-expected U.S. employment report.

In late trading on Nov. 4, the dollar index increased 0.1 percent to $90.725, climbing from its lowest level since April 2018. But on the week, the index decreased 1.3 percent, its largest weekly loss since early November.

“It has been another bad week for the US dollar,” analysts at Japanese financial service company Mitsubishi UFJ Financial Group (MUFG) said in a note, Reuters reported. “It will encourage speculators to rebuild short U.S. dollar positions which have been pared in recent months.”

By contrast, the euro and Swiss franc were headed toward their best week in a month against the dollar.

The U.S. dollar declines when the its value is lower compared to other currencies in the foreign exchange market, according to The Balance. The result is a decline in the dollar index. A declining dollar can also mean a fall in the value of U.S. Treasury, which drives up interest rates. It can mean that foreign central banks and sovereign wealth funds are holding fewer dollars, lowering the demand for dollars. 

Here are three things to know about why the U.S. dollar is crashing and whether a bigger trend is in place.

1. Weak U.S. employment report

A good U.S. labor market is generally good news for dollar investors. However, an announcement of an unexpected rise in payroll employment or fall in the unemployment rate may raise fears of inflation. That could make dollar assets less desirable and put downward pressure on the dollar, the Federal Reserve Bank of New York’s Current Issues in Economics and Finance.

The recent employment record was weaker than expected, and this soured investors on the dollar — even though most investors shrugged this off. Monthly payroll data was expected to show employment growth, but at a slower pace than what actually happened, The Financial Post reported.

2. Stimulus talk ups and downs

Talk of a possible imminent stimulus deal helped the dollar rally slightly before the weekend but the lack of an agreement could hurt the dollar.

The two narratives that have dominated trading in recent sessions are likely to remain the key drivers in foreign exchange, Don Curren, market strategist at Cambridge Global Payments, told Nasdaq;

  • Excitement over the renewed prospects for Congress approving another U.S. stimulus package.
  • Enthusiasm about progress in developing vaccines for covid-19.

3. Vaccine not a shot in the arm for the dollar

Don’t expect the covid-19 vaccine to boost the U.S. economy. In fact, the dollar is likely to begin a drop off as much as 20 percent in 2021 should covid-19 vaccines become widely distributed. That could help revive global trade and economic growth, according to Citigroup Inc.

“Vaccine distribution we believe will check off all of our bear market signposts, allowing the dollar to follow a similar path to that it experienced from the early to mid-2000s” when the currency started a multi-year downturn, Citigroup strategists including Calvin Tse wrote in a report in November, Al Jazeera reported.

* * *

Despite these three risk factors, there doesn’t seem to be widespread worry of a collapse now or any time soon, wrote Brad McMillan, chief investment officer and managing principal at investment adviser Commonwealth Financial Network, in a July Forbes report. July, at the time, was the dollar’s worst month since 2010

McMillan compared the dollar to e-commerce giant Amazon.

“If you think of currencies as stocks, you could think of the dollar as being the Amazon of the currency world. Like Amazon’s stock, sometimes it is worth more—and sometimes less. Volatility in a currency’s value does not mean the currency will collapse any more than a drop in Amazon’s share price means the company is going away,” McMillan wrote.

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Amazon, like the dollar, isn’t going anywhere or giving up its market dominance, despite the competition, McMillan continued. “So, think of the dollar as Amazon, with a deep and commanding presence in its market, deep market share, substantial commitments from users, and an established array of services and infrastructure that makes it hard to unseat.

“In this comparison, Walmart is China, which has been working very hard to replace the leader over a period of years but with limited success. And the comparison continues in that if China eventually does manage to replace the dollar, it will be years from now—and we will see it coming well ahead of time.”

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