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US Dollar Under Pressure


Image source: Clari Massimiliano / Shutterstock.com

What's going on?

Ouch! The US dollar slumped to a seven-month low versus other major currencies on Tuesday as enthusiasm about the US economy continued to cool.

What does this mean?

President Trump’s election in November set off a wave of optimism from investors: his pro-growth policies, like tax cuts and spending on infrastructure, were supposedly going to lead to a significant pickup in US economic growth.

However, they have yet to materialize, and investors seem to have either delayed or watered down their expectations for significant reforms from Washington. Meanwhile, economic data is pointing to a moderate slowdown in the momentum of the US economy.

Why should I care?

For markets: A weaker currency supports stock prices in the home country.

US stocks are trading near an all-time high and the weaker dollar is likely part of the story. As the dollar slides in value, it’s more attractive for foreign investors to buy American stocks because they are now cheaper for them. On top of that, US companies that operate abroad will start earning more from overseas sales, since they can convert their foreign currency earnings into comparatively more US dollars. This pushes up profits for multinational companies based in the US (like McDonald’s, Facebook and many others).

The bigger picture: The rest of the world is looking rosier.

The euro hit a six-month high versus the US dollar on Tuesday, partly because investors think that the risks from anti-establishment politicians in the eurozone have receded significantly for the time being (e.g. the French election). The upcoming election in the UK is expected to make a “soft” Brexit more likely (i.e. a deal that supports the economic status quo between the UK and Europe). In short, the US dollar is falling versus other currencies partly because other countries’ economies are looking relatively more attractive (especially compared to earlier this year).

Originally posted as part of the Finimize daily email.

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