U.S Dollar weakness is a point of concern given the potential ramifications it could have on the global financial system. The greenback has tumbled in recent weeks, as U.S equities rallied to record highs. It has also weakened on losing its safe-haven appeal even as U.S-China relations deteriorated an issue compounded by a second wave of coronavirus infection in the U.S.
Dollar Weakness Positives
Over the past week, the greenback has shed more than 1.6% in value against the other major currencies, going as far as touching 22-month lows. The sell-off comes barely four months after the dollar hit a three year high, shy of the 103 level, as U.S. Equities crashed in March amid the COVID-19 pandemic.
A weak dollar is not all bad. It is especially considered a good thing for the U.S economy as it makes its exports affordable and competitive in the international market. Likewise, a weak dollar is good for U.S multinationals that book most of their revenues overseas while bearing most of the costs at home.
Weak Dollar Negatives
However, a weak dollar this time might not be good, especially on signaling weakness in the U.S economy. The economy has contracted in recent months in the wake of the COVID-19 pandemic. Economic data has weakened significantly, raising serious doubt economic growth.
With the Euro strengthening as the U.S dollar weakened across the board, there is already talk that the single currency is slowly replacing the greenback as the next safe-haven. As it stands, the dollar is at great risk of losing its world’s reserve currency and sending the shock waves through the financial markets as the U.S continues to crumble amidst the COVID-19 pandemic.
A weaker dollar might signal that global investors have already priced in the worst of the COVID-19 pandemic. The rally in equities is a clear indicator that investors are no longer concerned about the COVID-19 pandemic as stocks are trading at record highs.
It promises to be a defining week for the dollar and U.S equities given the string of data and events lined up. The Federal Reserve is poised to announce the outcome of its policy meeting Wednesday, likely to shake the market as well as the dollar.
