Why is the US dollar losing its shine?

2023-07-28 19:18

The US dollar's decline has gained speed this month as investors pare back their interest rate expectations.

The greenback soared to a two-decade high last September, driven by the Fed's aggressive pace of interest hikes. But then came recession fears, the collapse of three regional banks and worries about congressional infighting and US spending.

Now, as inflation continues to cool, the Federal Reserve appears to be nearing the end of its rate-hiking cycle. Last week, that helped lead the US Dollar Index, which tracks the dollar versus the British pound, euro, Swiss franc, Japanese yen, Canadian dollar and Swedish krona, to its lowest level in more than a year.

The Fed on Wednesday raised interest rates by a quarter point and hinted at another hike later this year. But it's possible that a second hike never comes and the Fed decides to move on to the next phase of its inflation fight — keeping rates steady until inflation moderates to its 2% target.

As the central bank gets closer to possibly finishing its hiking cycle and other central banks around the world that began raising rates after the Fed catch up, the greenback is nearing a more sustainable level, some experts say.

"The dollar lost some of its luster as the only game in town," said Kathy Jones, chief fixed income strategist at Charles Schwab.

Why does that matter? The dollar's decline could be a tailwind to some companies' earnings.

Last year, an unfavorable exchange rate weighed down the top lines of tech companies, including Salesforce, Microsoft and Apple, which tend to generate much of their revenue overseas.

A monster run in tech stocks has driven much of the market's gains this year. The dollar's decline could offer some support to tech earnings, further boosting those stocks and in turn the broader rally.

But any benefits from a falling dollar to corporate earnings will likely be limited, says Jones.

The dollar also likely doesn't have more room to slide, says Seema Shah, chief global strategist at Principal Asset Management.

While Japan hinted Friday it could gradually begin to raise rates, sending the yen up against the dollar, the European Central Bank said Thursday it could pause at its next meeting in September.

"It's not like the Fed is going to be cutting rates when the other central banks are raising rates. That's fairly unlikely," said Shah.

Gold could also benefit. Gold prices have risen over 6% this year, supported by sliding Treasury yields and a decline in the dollar. The precious metal is priced in dollars, making it cheaper for investors outside the US to buy when the greenback's value falls.

The Dow slips to snap 13-day rally

The Dow Jones Industrial Average index fell Thursday, cutting short a historic 13-day streak of gains.

The blue-chip index fell about 237 points, or 0.7%. That comes after the index on Wednesday saw its longest run up since 1987, and its highest level since last February.

If the Dow had closed higher on Thursday, it would have been its longest daily streak of wins since 1897.

The Dow, up roughly 6% for the year, has rallied in recent weeks as cooler-than-expected inflation data has investors optimistic that the economy could avoid a recession.

That, in turn, has spurred investors to snap up shares of economically sensitive stocks.

The S&P 500 and Nasdaq Composite both fell about 0.6% on Thursday.

Still, all three major indexes are positive for the week and for the month.