The U.S. Dollar Takes a Dive
The U.S. dollar fell more than 4% in July for its biggest one-month drop in nearly a decade. On Tuesday, the greenback reached new lows once again as it remains under pressure on expectations that the Federal Reserve will succeed in its attempt to drive inflation higher.
The dollar has been falling sharply since spring of this year. In March, prices were sitting at a 3-year high. As the pandemic ensued, many of the reasons why the greenback can be viewed as favorable crumbled apart.
The greenback’s drop from its pandemic peak was associated to falling U.S. real yields and expectations that the global economy was poised to outperform the U.S. These days, there’s an even longer list to blame.
Most recently, the Fed has made it clear that policy makers would tolerate above-target inflation as part of a new policy-making framework that abandons their previous bias towards pre-emptively hiking interest rates when the labor market gets tight and signs of potential inflationary pressures build.
The rise in inflation expectations has dropped real yields. The negative expected return along with everything else going on in the world right now has made the currency unattractive to investors. Does this mean the end of the greenback as we know it or is there still some room left for fiat money on our magical planet?
I am not a financial advisor and my comments should never be taken as financial advice. Investments come with risk, so always do your research and analysis beforehand.