The U.S. dollar entered December under sustained pressure as weaker employment signals and expectations of further Federal Reserve easing changed the relative appeal of U.S. assets. The move was notable because it came alongside continued uncertainty about the next Fed chair, delayed economic data, and renewed questions about the durability of the U.S. growth advantage.
The move in context
The dollar was heading toward a tenth consecutive daily decline and was on track for its largest annual fall since 2007. A weaker-than-expected ADP employment report added to expectations that the Fed could cut rates again. Investors were also waiting for the PCE inflation report, while uncertainty surrounding the federal data calendar made private indicators unusually important.
What is underneath it
Currencies respond to expected differences in interest rates and growth. When investors expect U.S. rates to fall faster than rates elsewhere, dollar-denominated assets become relatively less attractive. A weaker dollar can support U.S. exporters and raise the dollar value of overseas earnings, but it can also make imported goods and commodities more expensive.
The dollar’s decline mattered for global markets because so much trade and borrowing is denominated in dollars. Emerging markets can benefit when a weaker dollar reduces the local-currency burden of dollar debt. At the same time, foreign investors in U.S. assets can see part of their returns offset by currency losses.
The road ahead
What follows will depend on whether weaker hiring becomes a broader economic slowdown. If inflation continues easing, the Fed could cut without damaging its credibility, reinforcing dollar weakness. If inflation remains sticky, the central bank may have less room to ease than markets expect, potentially reversing part of the move.