The value of the U.S. dollar has fallen about 5% over the last couple of months, as noted by a Bloomberg News columnist Thursday. It’s now at its lowest level in over a year relative to other currencies.
The ebbs and flows of currency markets can be complicated, to say the least. And whether a strong or weak dollar is good or bad isn’t always clear. So what’s behind this slump and what can we expect from here?
The dollar’s value, like the value of goods in any marketplace, is affected by how much demand there is for it. And lately, demand has been weakening.
“The main driver is the anticipation that the [Federal Reserve] is likely to cut interest rates in September,” said Kathryn Dominguez, an economics professor at the University of Michigan.
She said investors have been demanding other currencies, since lower interest rates in the U.S. make our bonds — which you need dollars to buy — less attractive.
Plus, investors might be worried about the U.S. economy. “Labor markets in the United States seem to be cooling, and growth prospects are, I think the word is, now ‘normalizing,'” she said.
But a weaker dollar isn’t necessarily a bad thing.
Meagan Schoenberger, senior economist at KPMG Economics, said American exporters — the agriculture sector, for instance — tend to see a boost when the dollar weakens “because essentially you’re exporting a cheaper product relative to the global economy.”
On the other hand, a weaker dollar makes imported products more expensive for Americans.
But Schoenberger said she’s not that concerned, in large part because retailers are reluctant to pass higher import prices on to consumers.
“We see that in the retail sales reports, for example, that consumers are becoming much pickier, but if you discount, they’re going to come,” she said.
And even though demand for dollars has been weakening, there will always be some, said Juan Perez, director of trading at Monex USA.
“The dollar is a safe haven during times of global chaos, but it’s also a safe haven when the U.S. economy is just naturally doing OK,” he said. Because the dollar is still, after all, the world’s reserve currency.
