US dollar as a subject can easily cause some of my investors to feel overwhelming sadness, happiness, anxiety, or panic. Every few years, events conspire to thrust the de-dollarization debate back on the spotlight. If you are expecting a collapse of the US dollar, you should stop. Any reports of the dollar’s demise are greatly exaggerated.
At the time of writing this, the US dollar has continued to rise after a strong employment report before the weekend helped drive home the Fed’s message at the recent FOMC meeting. Interest rates are jumping, and the market has downgraded the chances of a May Fed cut to about 75% from slightly more than 90% before the weekend.
The latest US employment data blew away expectations, jumping by 353k, nearly twice the median forecast. That, coupled with the 0.6% rise in average hourly earnings, which was also twice expectations, helped drive home the Federal Reserve’s reluctance to endorse what had been market speculation of a March rate cut and an aggressive rate cutting sequence.
I know the world is a much friendlier place especially for emerging market assets when the dollar’s on the back foot. Many of the investors I’ve conversed with maintain a bearish outlook on the dollar amid the buzz surrounding the Fed’s easing cycle. Unfortunately, they have been wrong on their dollar bets many times in the past. This is something that I can’t explain.
Back in late 2023, the decline in the dollar was not entirely supported by interest differentials. While there were substantial expectations for Federal Reserve rate cuts, similar expectations for cuts by other central banks emerged.
Concerns about substantial dollar weakness may also be countered by the outlook for growth and inflation. Projected growth in the Euro area is anticipated to be weaker than in the US this year, while inflation, measured by both headline and core indicators, is presently at higher levels in the US compared to the Euro area.
Lastly, geopolitical factors could favor the greenback. Boys and girls, if you are a dollar bear, my advice to you is to moderate your expectations regarding the weakness of the dollar in the coming months. Forgive me if I’m repeating myself, ungrateful dollar users still expecting a collapse should be careful what they wish for.
