The increase of U.S. interest rates in 2017 did not stop the dollar value dropping by ten percent, which sounds a bit blush knowing that an increase in interest rates motivates foreign investors to buy American assets and also helps to keep inflation in check.
Hussein Sayed, Chief Market Strategist at FXTM, an online currency brokerage firm, wrote in a report on Feb. 5tgm that signs of life in Europe’s economy, particularly Germany and France, are causing some investors to flock to the euro instead of the dollar.
Sayed added that the resurgence in Europe even has more investors betting that the European Central Bank will unwind its massive bond-buying program, similar to the Fed’s, after the 2008 financial crisis, sooner than expected. That will make the euro much more attractive than the dollar. Some even predict a rise in interest rates by the European Central Bank this year.
Most analysts predict a similarly tough year for the greenback in 2018. Goldman Sachs expects a “soggy dollar,” meaning a dollar that has “all but finished pricing the relative strength of the U.S. vs. the global economy.”
The dollar’s slide cannot be pinned entirely on what is happening overseas. Some analysts blame the U.S. political dysfunction that might be pushing the dollar down.
On Friday 9th of this month, the government in Washington shut down for the second time in three weeks after the congress failed to finance agencies to keep them open. The shutdown did not last more than a few hours. Congress and the White House had hoped to avoid another shutdown, especially coming less than three weeks after the government was shuttered for three days after lawmakers failed to pass a short-term spending bill. Nevertheless, the Trump administration began advising federal agencies to get ready just in case.
The fall of the dollar value does not necessarily affect the U.S stock market negatively; in fact it helps the economy. Trump said in 2017 that the dollar is too strong and stable and wouldn’t mind if it loses a bit of its value, despite his “America First” agenda.
The fall will benefit many multinational American companies such as “Apple”, “Microsoft”, and “Procter and Gamble” by lifting the value of foreign sales once translated back into dollars.
A steep downfall in the dollar value can cause a serious inflation. However, this scenario is very unlikely. Despite the Washington chaos, most international investors still see the dollar as the most stable currency. The euro, the Chinese Yuan, gold and bitcoin are unlikely to substitute the greenback yet.