Why is US Dollar falling?

The downward spiral of the US dollar may have worried certain influential people including US President Donald Trump. However, the question arises: Why would he worry about the fall of USD?

Usually, it is seen that the falling currency rates indicate more inflation, aided with higher unemployment and lower GDP growth thereby, making the situation get really murky on the ground for citizens. It is observed that people tend to vote out incumbents when they feel inflation along with the pains of increased unemployment over four years since the last election.

So, USD falling is an important event, even politically, and may make matters worse for Trump re-election. COVID-19 dragged the economy along with the falling USD, making Trump re-election difficult. Besides, the talks are already going on that if the democrat candidate wins, the tax rates could be increased and the equities may suffer. So, that is one major indirect influence that the falling USD may have on US equity markets in the coming months.

In reality, many fear that USD is witnessing just the beginning of a larger structural downtrend, driven partially by steady post Coronavirus recovery in other countries, including Europe and Asia.

Few analysts expect the dollar index to trade at 80 versus the basket of global currencies, in the worst-case scenario. Right now, the dollar index is trading at 93 levels versus the other global basket of currencies. In March 2020, the dollar index was trading at 102.8 levels. Already, the USD has corrected by little over 9 per cent from March 20 levels and in July alone, the gauge of the dollar against its biggest peers is down by more than 4 per cent indicating the worst route in over a decade.

July was special for Euro and GBP as the gains recorded in July for Euro against USD highlights its biggest jump in a decade while the gains recorded by GBP are the best since 1990 versus USD. July also saw almost every major currency in the world gain against the greenback.

What weaker dollar does is that it tends to make the economy grow slower than it otherwise would have thus, making things tougher for policymakers. With weakening currency, the investors tend to invest their monies elsewhere, and here is where the emerging countries like India can attract more dollar investments. So, a weakening USD is great for the emerging market equities and dollar-denominated assets such as crude oil and gold.

The weakening US economy and ultra-loose monetary policy adopted by the US Fed are the two most important factors behind the weakening USD. It is expected that the interest rates will be near zero for the years to come in the US.  The continued spread of Coronavirus is slowing the speed of the economic recovery while apparently, Eurozone and Asia is faring relatively better.