- The US dollar fell below 100 against a basket of currencies
- The lowest performance in 15 months
- What it means
Harare- The US dollar index saw a nosedive on Friday, falling below 100 and hitting its lowest levels in over a year. The decline comes amid indications that US inflation is on a downward trend, sparking hopes that the Federal Reserve might soon conclude its current monetary policy tightening cycle.
The United States Dollar Index measures the performance of the dollar against a basket of other currencies including EUR, JPY, GBP, CAD, CHF and SEK. The EUR is, by far, the largest component of the index, making up 57.6% of the basket followed by JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%).
US consumer inflation eased to 3% the best inflation figures since 2021 while producer inflation marginally increased by 0.1% less than expected in June, despite a robust labour market.
While the US central bank is still expected to raise rates by 25 basis points in July to further cool down inflation through curtailing borrowing, traders have scaled back their bets on further rate increases throughout the rest of the year. Also, market pricing suggests that the Fed may begin cutting rates in the coming year to boost demand.
As a result of these developments, the dollar plunged to over one-year lows against the euro and sterling, while also declining to multi-month lows against the yen and antipodean currencies.
A weaker dollar can pose both challenges and opportunities for the global economy, depending on the specific circumstances.
A weaker dollar makes US exports more competitive and affordable for foreign buyers, which can boost demand for American products and support US economic growth. This is a buy in move for the US given its current trade war with one of its greatest trading partners, China. This is key for financing the Ukrainian war which US is actively participating in on its quest to defend the principle of national sovereignty and national interests.
Moreover, a declining dollar can attract foreign investment, which can stimulate the US economy, but it can also make US assets less attractive to foreign investors, which could ultimately lead to a decrease in investment.
A weaker US dollar can have both positive and negative effects on African countries and Zimbabwe, depending on their specific economic circumstances.
In African context, a weaker dollar makes African exports more competitive and affordable for US buyers, which can boost demand for African goods and support economic growth in the region. A sustained weaker dollar can make it cheaper for African countries to pay off US-denominated debts, which can reduce the burden of debt repayment and free up resources for other development projects.
However, a weaker dollar can also lead to higher inflation and import costs, which can hurt the purchasing power of African consumers and businesses. Moreover, a weaker dollar can reduce the value of remittances sent to African countries from the US, which can negatively impact household incomes and consumption.
Therefore, the possibility of further Fed rate hikes remains uncertain. While the central bank is still expected to raise rates in the short term, traders are betting that the Fed may soon begin to cut rates. The implications of these decisions could have far-reaching consequences for the US and global economy, including the potential for increased inflation, decreased investment, and changes in global trade patterns.
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