Dollar doldrums are back as inflation worries heat up

Though bitcoin and other cryptocurrencies are the talk of the moment, the good old US dollar still reigns as the world’s reserve currency. But it hasn’t been too mighty as of late.

The US Dollar Index, which measures the greenback versus the euro, yen and several other major global currencies, has fallen about 2.5% in the past three months -— and it’s now down more than 7% in 2021.

Fears of rising inflation are taking a bite out of the dollar, as are expectations that the Federal Reserve will keep interest rates near zero for the foreseeable future despite inflation concerns. Both inflation and historically low interest rates lower the value of a currency over time.

A weaker dollar could be bad news for any American looking to travel abroad anytime soon as well as US consumers looking to buy exported goods, which become more expensive as the dollar falls.

The greenback’s slump is also one of the reasons that prices for oil, food and other commodities and consumer goods have surged lately.

But investors in major blue-chip multinationals are licking their chops: Companies such as Apple, Microsoft, Coca-Cola, Caterpillar and others that generate a big chunk of revenue overseas should get a boost.

That’s because their products are more affordable to foreign buyers, and the value of sales from international transactions goes up when they are translated back into US dollars.

So it’s no wonder that many investors have been globetrotting and scooping up shares of big US firms that have a significant presence in Europe and Asia.

The S&P 500 is up about 10% in the past three months compared to just a 4% gain for the Russell 2000, an index of smaller companies that tend to do more business in the US.

Companies in emerging markets, especially China, stand to gain from a weak dollar too. The SPDR Portfolio Emerging Markets ETF, is up about 7% in the past three months.

Weak dollar trend likely to continue

Strategists at the BlackRock Investment Institute said in a report Monday that the “expectation of a flat to weaker U.S. dollar” is a reason why they are bullish on emerging markets stocks.

Several other experts think the weak dollar trend is likely to continue, mainly because the Fed has shown little willingness to raise rates anytime soon.

“The market still views the Fed as the ‘most dovish’ global central bank, and as long as that’s the case, the dollar will have a hard time rallying much,” said Tom Essaye, the founder and president of Sevens Report Research, in his morning newsletter Monday.

The May jobs report, released last Friday, was good but still showed that fewer jobs were added than economists expected, likely will give Fed chair Jerome Powell added ammunition to the argue that rates need to stay low for longer.

The jobs report “brought a major shock for the dollar bulls who were hoping for a strong number” said Naeem Aslam, chief market analyst at AvaTrade, in a Friday report.

Note that the job numbers for April were an even bigger disappointment — and Powell doesn’t want to go down in history as being the Fed chair who took away stimulus too soon. It seems that he’d rather let inflation pick up a little steam, even if it hurts the dollar.

“There is still a big employment gap left by the pandemic, which the Powell Fed is committed to filling,” said Kit Juckes, macro strategist at Societe Generale, in a report Monday. “Policy remains easy, for now, and that has delivered a weaker dollar.”