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Dollar Plunges 7.4% in Past Six Months — Here’s What It Means

The U.S. dollar has been in quick decline over the past several months, one of several indicators raising fears that the economy could be headed for a recession.

Since a recent peak in early November, the greenback has fallen by 7.4%, according to the nominal broad U.S. dollar index. The falling dollar comes after a yearlong period of the Federal Reserve hiking interest rates in response to the country’s rip-roaring inflation.

And there are several reasons behind the decline. But to put the current situation into perspective, it must be noted that the dollar surged in value during the height of the Fed’s tightening so is in a way falling back to Earth from the highs notched last year.

Part of the dwindling power of the dollar is because, after a barrage of aggressive rate hikes, the United States is now entering a different phase of its monetary policy. Recent reports suggest that inflation is now meaningfully declining and the labor market is finally softening, as Fed officials have hoped. That means the central bank is likely to end its tightening either at its next meeting or at its June meeting.

“The Fed is now talking about pausing; the markets think that they’re going to be cutting interest rates. So we’re in a different stage of the interest rate cycle,” Desmond Lachman, senior fellow at the American Enterprise Institute, told the Washington Examiner.

While the Fed may be putting its foot on the brakes soon, other central banks, such as the European Central Bank, are continuing to raise interest rates.

Meanwhile, there are some signs that the U.S. business cycle may be turning negative. Jobless claims, a proxy for layoffs, have been trending up, a sign the rate hikes are beginning to corrode the red-hot labor market.

Additionally, a report from the Philadelphia Fed this week showed factory activity in the mid-Atlantic region fell to its lowest level in three years, another indication that the economy is weakening and the end of the Fed’s cycle is nigh.

Another factor at play is the banking crisis that began with the collapse of Silicon Valley Bank last month. SVB’s dramatic failure then triggered the collapse of Signature Bank and created fears that other regional banks could end up failing due to runs on the banks. While there haven’t been any major U.S. bank failures since, the situation is still fluid and is causing some angst in the currencies market.

The SVB collapse raised expectations that the Fed would end its tightening sooner as well.

And finally, there is the looming issue of the U.S. debt ceiling. The Treasury Department began using “extraordinary measures” to prevent the country from defaulting on its obligations after the U.S. hit its debt limit in January. That only gives a limited amount of runway, though, as the measures essentially amount to shifting money around government accounts in order to pay incoming bills without issuing new debt.

Now the country faces a much more challenging and potentially economically calamitous deadline. The so-called X date, which is the date when the U.S. would exhaust its extraordinary measures, has been forecast to be as soon as this summer or as late as the fall.

Republicans are hoping to use the precarious situation to exact big spending concessions from President Joe Biden and Democrats, and the negotiations will be key to how badly the detente affects the dollar.

Lachman said the situation only adds to the financial “angst.”

He noted that there is also a contingent of countries that believe that the U.S. has weaponized the dollar, for instance, by imposing sanctions against Russia and freezing the reserves of the Iranians.

“So people don’t want to be stuck with dollars, so they’re moving out of dollars for that reason,” Lachman said.

There have been some asserting that the declines experienced by the dollar in recent months are evidence that the dollar’s status as the global reserve currency is at risk, although many experts and economists are rebutting that notion.

A few weeks back, the International Monetary Fund provided an update on its database of world foreign-exchange holdings. That showed that the dollar’s share had fallen to 58% at the end of December — the lowest share since 1995.

Former Treasury Secretary Lawrence Summers this week pushed back on the idea that the U.S. dollar is losing its global dominance. He used China to make his point in an interview with Bloomberg.

“There has never been a country where there was strong a desire to move as much capital out of the country as we’re seeing in China right now,” though capital controls are limiting the outflow, Summers said. “Is that really going to be a place where people are going to decide they want to hold reserves on a massive scale?”

A recession, though, would hurt the dollar. Erik Nelson, macro strategist at Wells Fargo Securities in London, told Reuters that it is becoming “increasingly clear” the U.S. economy is moving toward a downturn.

“A U.S. recession would be bad for the dollar. If the U.S. is leading the world into recession, it’s hard to see a big demand for the dollar,” he said.

But Lachman said he expects not only a recession but also a broader global financial crisis in the next year or so, something he said could bolster the dollar’s place as the worldwide reserve currency.

“I think that if my view is right, that we’re going to have a global financial crisis … then people will come back to the dollar because in times of real trouble for the global economy, the U.S. currency is regarded as a safe haven,” he said.

  • Proud Veteran says:

    bidens America!

  • John says:

    Destroy the domestic terrorist fraudulently elected communist Democrat coup d’etat government and watch the dollar rise again, then elect Trump once again like he won the first time but was cheated and watched the country become number one again that’s simple but saboteuring demons and Antichrist but rather kill Americans than let that happen so Americans now have a choice to fight communism and die or just continue being a coward do nothing and die under the hands of these luciferian communist Antichrist demons

  • Nate says:

    This won’t effect Biden’s monitary fund. He’s paid in Chinese!

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