In addition, the US dollar – historically viewed as a safe haven currency – is showing record levels of instability. Recent geopolitical developments, including tensions in the Middle East and Ukraine, along with the implications of President Donald Trump’s policies, have cast doubt on the currency’s value. The dollar offers higher interest rates than major competing currencies right now. The way it has done lately would suggest the opposite – a troubling trend apparently worrying investors and economists alike.
In the past, the US dollar has always been viewed as a safe haven asset in times of turmoil and uncertainty. Because if you’ve been following recent events, you’ll know that the dollar’s current status is suddenly put in question. This risk stems from a confluence of domestic and foreign factors. This time, the dollar’s value has come to the forefront as a result of the ongoing trade war started by President Trump. Thanks to the democratically elected leaders of the U.S. Analysts suggest that Trump’s policies may have contributed to the current skepticism surrounding the currency’s strength.
Despite luring in investment with competitive interest rates, the dollar has taken a one-way trip south these last few months. The decline is staggering in its contrast to the Euro’s steady exchange rate. It has continued to remain in a very predictable range from 1.10 to 1.16. More recently, the exchange rate made a run above the 1.16 barrier on several occasions. That bump was short-lived. These fluctuations point to deeper cracks in the dollar’s foundation.
Geopolitical strains, especially elevated oil prices due to these clashes, are set to stoke inflation worries once again. Now that inflation is returning to the economic forefront, it may be one more factor making the outlook murky for the US dollar.
Oil prices and inflation
While these two topics may seem unrelated, oil prices and inflation long have depressed currency valuations. Smart market trends are showing a re-emerging interest in these important economic metrics.
The June Federal Open Market Committee (FOMC) meeting is shaping up to be a watershed for the dollar’s near-term prospects. An event that’s of particular interest to investors, as it’s likely to produce more clarity on future key interest rates. Surprises are not expected, but when Federal Reserve President Jerome Powell speaks, he could help reveal the future direction of monetary policy. If the Fed’s Chair plays his cards right, his forthcoming remarks can provide the indispensable wisdom that breaks this downward spiral in long-term key interest rates.
If Powell does signal any kind of shift in interest rate policy, it can have major implications on the outlook for the US dollar. Such an abrupt shift in interest rates would have sweeping repercussions across currencies, dictating the flow of investments and impacting America’s relationships with trading partners abroad. So naturally, all eyes turn to Powell as the pressure mounts for him to communicate just what the Fed plans to do next.