Investors Stay Cautious as Dollar Weakens

The U.S. dollar’s decline continued this week, prompting investors’ concerns that a drop initially seen as a boost for the U.S. economy could become more volatile if it continues to fall at the current pace.

The dollar had its worst week in more than a three-month period and has now lost 9.1% YTD, thus, reaching its lowest level in over two years. Uncertainty over whether the Fed will demonstrate another interest rate hike in 2017, an escalation of tensions with North Korea, and the threat of hurricanes in the southeastern U.S. have contributed to the currency’s decline in the past couple of days.

Policy makers and investors have encouraged a weaker U.S. currency after a four-year rally took the dollar to its highest level in nearly a decade. A decrease in the value of the dollar makes U.S. goods more competitive on the international front. A weaker currency also gives the Fed more room to raise interest rates. However, if the dollar’s value continues to decrease at this pace, it would create new challenges for the U.S. and other global economies.

A serious decline by the dollar could lead to a loss of faith in the U.S. economy, raising concerns about overpriced stock-market valuations and complicating the Federal Reserve’s monetary policy. If the currency keeps slipping, it could increase fears that inflation will accelerate beyond the projected pace.

“In the global economy, a drop in the U.S. dollar could prop up other currencies, challenging a steady recovery in the eurozone and putting pressure on Chinese exporters” said Keith Knutsson of Integrale Advisors. Any slowdown of global growth from stronger currencies in Europe and Asia could also be a threat to emerging markets, dependent on strong demand from the developed world to support their export industries.

The recent weakness of the U.S. dollar reflects a long-awaited pickup in growth of the international markets, as other currencies rallied in line with their countries’ improving economic outlooks. Furthermore, the depreciation of the dollar helped boost corporate profits in the U.S. over the past two quarters, strengthening markets as they climb to record highs.