Friendship ended with the US dollar. Now, other currencies are our best friends. It’s just a meme, actually, but not far from the truth. The USD was the leading player in the Forex market and a safe haven for investors in 2022. However, in the first half of July 2023, it reached its lowest point since April of the past year. Let’s investigate why it has happened and what’s next.
The US dollar index reflects the strength of the USD against the bucket of other major currencies. In other words, this indicator provides insights into the overall position of the US dollar. The chart depicting the movements of the DXY in July tells us that things aren’t going well.
When we examine a more extended period, we will see that the DXY hasn’t dropped below the 100 mark since April 2022.
In fact, the frank, the euro, and the pound have bridged the gap.
Last week’s fall of the DXY can be attributed to inflation figures. Inflation has been on a steady decline – the YoY metric is standing at 3% now. Inflation and a currency rate have a direct correlation mostly (although there are some exceptions, like the Turkish lira, but it’s an entirely different story). Central banks have a crucial role here, as they raise interest rates to combat inflation.
The decrease in inflation within the US suggests to investors and analysts that the Federal Reserve (Fed) is nearing the end of its hawkish cycle. In other words, market participants anticipate that there will be no more than one interest rate hike.
Such a forecast leads to diminishing appeal of the USD and increasing demand for alternative assets – other major currencies and stocks. When dealing with these types of assets, tools such as economic calendar and stock screener can help in market analysis.
An important note: despite the continuous decline in inflation month after month, this metric and other ones, such as consumer price, still remain pretty high. This implies that the Fed will probably halt its cycle without reducing the key rate, and that the hawkish mood might last longer than it seems.
Of course, there will be some short–term growth drivers for the DXY and the USD in the following months, however, they are unlikely to be significant for long-term prospects. Moreover, many experts anticipate a major crisis in the US economy.
All of this sounds like a reason to consider alternative assets. However, before making any decision, conducting thorough research is essential – and this time is no exception. Who knows – maybe your analysis will reveal that it’s too early to write the dollar off.