Dollar Stumbles, Again

The US dollar took a hit this week, against a basket of stronger currencies, as a direct result of bets made that the Federal Reserve will lower interest rates several times this year.  With tensions brewing between the US and Iran, yen has a safe-haven of support, paring away what could have been better days for the greenback. 

This dollar-softening period has helped Bitcoin extend its strong weekend run. After breaking $11,000 for the first time since March of 2018, the world’s biggest—and best-known—cryptocurrency has skyrocketed almost 200 percent on the year. But with Facebook’s announcement of its plan to launch the Libra digital coin, optimism about virtual currency diversification could only add to Bitcoin’s optimism. 

Of course, investors are now waiting—or, rather, continue to wait—to see whether United States president Donald Trump will, in fact, call a truce with Chinese President Xi Jinping, at next week’s G20 summit in Japan.  Indeed, today’s session at the market is stuck between a rock—that is the Fed’s dovish turn last week—and a hard place—next week’s G20 summit.

Now, the markets believe that if the two capital cities—Washington and Beijing—remain stubborn and refuse to pull back on their increasingly heated trade rhetoric, it will force the Fed to cut interest rates. This will act as a kind of preventative measure against a possible economic slowdown that would otherwise come from yet higher US tariffs on [Chinese] imports. 

At present, interest rate futures imply that traders will price in a guarantee the Fed will certainly cut rates by the end next month (July). However, many would dare to gamble that the Fed could lower rates at least two more times following that.

All of this is to say that continued expectation of falling rates in the US have consistently contributed to a weakening dollar. One index that tracks the dollar against that basket of six currencies fell more than 1.5 percent last week. This is the biggest weekly loss, for this index, in the past four months.  Indeed, by afternoon on Monday, the dollar index took a 0.24 percent dip, at 95.985, positioning the dollar on a steady decline. To put this into perspective, the Japanese yen made remained steady, in this index, balancing out to 107.31 after rising to 107.45 on Friday as anxious traders buoyed their greenbacks by the much safer currency.