The Stars Aren’t Aligning For The Dollar

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What's going on?

The US dollar hit its weakest level against other major currencies in two and a half years on Friday!

What does this mean?

Harvey and Irma (the two recent hurricanes) are being partly blamed for the dollar weakness, as they will likely damage the US economy at least in the near term. A senior official with the US Federal Reserve (“the Fed”) suggested last week that the hurricanes could push back the Fed’s next target interest rate increase (and since investors tend to like to invest in countries with higher interest rates, all else equal, that gave them more reason to sell the dollar).

But it’s not just events in America that are pushing down the dollar’s value. The European Central Bank hinted last week that it would soon take action designed to increase interest rates in Europe, which would make the euro – a major competing currency to the dollar – relatively more appealing. Meanwhile, Canada’s central bank unexpectedly raised its target interest rate last week, pushing up the “loonie” versus the US dollar.

Why should I care?

For markets: The weaker US dollar is making life easier for US stocks.

Most large US companies have significant international operations. When the dollar weakens, as it has so far this year, it makes companies’ international profits worth more in dollar terms (because the profits that are made in other currencies are now worth more in dollar terms). In turn, the higher profits tend to push up US stock prices – which has occurred this year as the dollar has weakened.

The bigger picture: Investors could be ignoring underlying strength in the US economy.

US economic data is still pointing to a relatively strong economy: American manufacturing businesses recently grew at their fastest pace in six years, businesses are spending more money and current predictions suggest that economic growth is picking up compared to earlier in the year. If the US economy is, indeed, picking up speed substantially, the dollar will likely get a boost, all else being equal (Why? Click here).

Originally posted as part of the Finimize daily email.

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