The US dollar has been experiencing a quick decline over the past six months, and this alongside other factors is generating concerns that the country may be heading towards a recession.
According to the nominal broad US dollar index, the greenback has decreased by 7.4% since its peak in November. It is important to note, however, that the dollar had spiked in value during the height of the Federal Reserve’s tightening, so it could be interpreted that the current fall is a correction after a long period of high value. The Fed had been hiking interest rates to tackle the US’ inflation problem.
A series of reasons may have contributed to the fall. Firstly, the United States is now moving into a different phase of monetary policy: after a series of aggressive rate hikes, reports show inflation starting to decrease, and the labor market is softening. Consequently, the Fed is expected to end its tightening either at its next meeting or at its June meeting. Other central banks, such as the European Central Bank, however, are continuing to raise interest rates.
Other worrying signs point to the US business cycle starting to turn negative, with jobless claims ticking up for instance. Plus, a report from the Philadelphia Fed displayed that factory activity fell to its lowest level in three years.
Meanwhile, the collapse of Silicon Valley Bank last month triggered the collapse of Signature Bank, and this situation fuels fears that other regional banks may face failure due to bank runs.
Finally, the issue of the US debt ceiling could prove economically calamitous if not addressed, as the Treasury Department started using “extraordinary measures” to stop the US from defaulting, though it only gives some limited time before it backfires. The implication of this, amongst other things, is that the Republicans may use the circumstance to extract big spending concessions from the Biden administration and the Democrats.
The declining value of the dollar has raised concerns about the dollar’s status as the global reserve currency. Nonetheless, economists and experts typically do not agree on this, and some believe that the prevalent use of the US dollar may be boosted in times of crisis.
The unemployment rate increasing and reports of the country moving towards recession could harm the dollar’s value still further. Nonetheless, some foresee a global financial crisis in the next year or so; if that should come to pass, the dollar’s place as the worldwide reserve currency may be reinforced.
Desmond Lachman, Senior Fellow at the American Enterprise Institute, believes that the events described above only add to the financial “angst”, noting that some countries believe that the US has weaponized the dollar in the past, adding that some investors may be shifting out of dollars due to that reason.
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