Strong Dollar Retreats... Dollar Index Falls 4%, Largest Monthly Drop in 12 Years

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Park Byung-hee] The US dollar is clearly weakening as the US inflation rate slows down. This is due to expectations that the US central bank, the Federal Reserve (Fed), will slow the pace of interest rate hikes.

According to major foreign media on the 21st, the dollar index, which reflects the value of the dollar against six major currencies, has fallen more than 4% since the beginning of this month. According to financial information company Refinitiv, this is the largest monthly drop since September 2010. Although the dollar index is still up 11% annually, the dollar has fallen for four consecutive days recently.

The US consumer price inflation rate rose to 9.1% in June but dropped to 7.7% in October. The producer price inflation rate also fell from 11.3% in June to 8.0% in October.

As the Fed’s aggressive tightening policy takes effect, lowering inflation rates and raising expectations that the Fed’s tightening will ease in the future, this is seen as the background for the dollar’s weakness.

At the recent Federal Open Market Committee (FOMC) meeting, the Fed decided on four consecutive giant steps (a 0.75 percentage point increase in the benchmark interest rate). Expectations are growing that at next month’s final FOMC meeting of the year, the Fed will opt for a big step (a 0.5 percentage point increase) instead of a giant step.

Fed Chair Jerome Powell did not clearly state a position on five consecutive giant steps at the early this month’s FOMC. Market participants interpret this as the Fed leaving room to slow the pace of tightening.

Foreign media analyzed that not only the slowdown in inflation but also signs of economic slowdown due to interest rate hikes are appearing in the housing market and manufacturing sector, increasing the likelihood that the Fed will adjust the pace of rate hikes.

Thierry Wiseman, investment strategist at Macquarie, said, "Everything indicates US disinflation," adding, "The US economy will slow in the first quarter of next year, and this (economic slowdown) is the background for the dollar’s weakness."

HSBC also analyzed in a report released this week, "Although the dollar showed strong gains over the past year, as the Fed’s tightening stance comes to an end, the opposite trend is expected next year," and stated, "The strong dollar has reached its peak."

According to the US Commodity Futures Trading Commission (CFTC), speculative volume betting on a strong dollar recently dropped to the lowest level in a year. Hedge funds and other speculative forces are also turning to dollar weakness.

As the strong dollar momentum weakens, emerging market economies are expected to breathe easier. Until now, emerging markets have faced increased inflationary pressure and rising debt costs due to their currencies weakening against the strong dollar.

This content was produced with the assistance of AI translation services.