The dollar value is falling. The dollar index has been falling throughout 2017. In fact, it has dropped in value by around 10% against six other major global currencies over the course of this year. The war of words between North Korea and President Trump appears to have been responsible for this drop in the value of the American currency.
However, all is not always what it may appear to be. Take the European economy. This has gained in strength over the past few months, Brexit notwithstanding. So what appears to be happening with the US dollar? At first sight, not a lot. The euro and pound have been gaining against the dollar, but why?
Is this due to the election of Emmanuel Macron as French president? He is well known for his pro-EU stance after all. This has given a boost to confidence in the euro rather than the dollar. The euro is now moving closer to the dollar in value – or is it the dollar that is falling? The euro, at $1.18, is 13 cents more than it was since the end of 2016.
On the 31st December 2016, the inter-bank EUR to USD spot rate was $10.522 to €10. It is now $11.82 to €10. The dollar appears to be losing ground on the euro. On the same date, the UK pound rate was $12.3 to £10. It now stands at $13.02 to £10. The Euro gain over that period was 6.27% while the UK pound gain was 5.85%.
So it’s not just the euro that is gaining on the US dollar but also the pound sterling. Not only that, but let’s look at other currency markets. The dollar has fallen against the Mexican peso, the Japanese yen and the Swedish Krona. What does this indicate?
It shows that the fall in the value of the dollar is not a localized issue. It is more general than that. People are walking away from the dollar – at least for now. They do not appear to be moving toward any specific currency – just away from the US dollar. Why should this be?
One answer: Donald Trump and his off-the-cuff tweets. The expected tax cuts did not materialize. The games with Russia are showing President Trump to be inexperienced in statesmanship compared to Putin. His foreign policy has displayed this to other world leaders. It is all but non-existent. His rhetoric means nothing to experienced European and Asian statesmen and women.
People are becoming alarmed at his belligerent attitude to foreign policy. His attitude to potentially dangerous situations, such as the North Korea issue, does not help to strengthen the dollar. Another issue is President Trump’s approach to business.
A weaker dollar makes it easier to export: US goods become more competitive abroad. He is on record as stating that he likes the dollar to be “not too strong.” One problem with this is that while American exporters gain from a weak dollar, importers lose out. Americans tend to become poorer as the dollar weakens.
A lack of unity in Washington and uncertainty over the Trump administration’s fiscal policies also contribute to a weakening dollar. A weaker dollar suits the president’s policy of supporting American business overseas. However, it also costs more to import, resulting in inflation. The Fed then increases the interest rate which in turn would give the dollar a boost – so back to square one!
For now, a steady drop in the dollar’s value will lead to a lack of confidence in the US economy. Unless this is remedied, the dollar could be under threat as one of the world’s major currencies. Nobody is keen on a benchmark currency that suffers from large swings in value.
Another issue is that Janet Yellen’s term as Fed Chair ends in February. A statement on who would be appointed to replace her would add some level of stability. The dollar value has been recovering in August, but only by small amounts.
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