Us Consumers May Have to Live with High Prices for Longer — and a Falling Dollar Could Be to Blame

Inflation and Recession Central Bank Policy Trends The Fed Forex Market

Summary:

US inflation has steadily cooled since mid-2022, thanks to large interest-rate increases by the Federal Reserve.However, a four-month drop in the dollar is threatening to derail that trend by raising the cost of imported goods.The dollar index has fallen by more than 11% from a peak reached in late September.

US consumers are getting used to being pleasantly surprised by cooling prices each month, with inflation extending a sustained decline thanks to the Federal Reserve's interest-rate hikes.

Annual increases in the Consumer Price Index slowed to 6.5% in December, the least in over a year, as disruptions to global goods supply chains caused by COVID-19 eased.

But the welcome relief on the prices front is now facing a new threat — in the form of a falling dollar.

The greenback is extending losses in January, after sliding almost 8% last quarter in the worst three-month slump in over 12 years. A weaker dollar raises the cost of imported goods, which would eventually feed into consumer prices in the US.

Why is the dollar falling?

The US currency has been in steady decline since end-September, and that largely represents a reversal of the trend that was in place from mid-2021 through the first nine months of 2022.

The dollar notched a stellar 17% gain during the three quarters of last year, buoyed by demand for its safe-haven status amid an adverse economic environment — marked by 40-year high inflation and a stock-market slump. In addition, the currency's appeal was burnished by the Federal Reserve's aggressive interest-rate increases, which boosted the yield on the greenback.

Us Consumers May Have to Live with High Prices for Longer — and a Falling Dollar Could Be to Blame_1

But the tide has been turning in recent months. A sustained moderation in inflation has tempered the odds of further Fed rate increases, while the reemergence of China's economy from pandemic restrictions has helped spark a rebound in emerging-market assets.

These factors have diverted investment flows away from the US currency, fueling its decline. The dollar index, which tracks the greenback against a basket of currencies, has fallen more than 11% from its late September peak.

A dim outlook for the US economy, which has lessened its safe-haven appeal, a softening outlook for interest rates, China's reopening and lower energy prices in Europe have all contributed to the dollar's weakness, Francesco Pesole, an FX strategist at ING, told Insider.

Signs of reflation?

The dollar's slump tells us several things about global markets, but it might have troubling implications for the domestic economy too.

Changes in currency rates can have an inverse impact on a country's inflation in subsequent months, according to a recent research note from Goldman Sachs. In other words, declines in a country's exchange rate can raise the cost of imported goods and lead to increased inflationary pressures.

The US is a net importer of materials such as lumber and semiconductors that are crucial in manufacturing supply chains, and these would become costlier due to dollar weakness. The price of overseas travel would also increase, adding costs for American consumers.

More important is the effect of a declining dollar on global economic activity, according to Danske Bank's head of FX and corporate research Kristoffer Kjær Lomholt.

"If we continue to see the dollar trade at current levels or even increase in weakness, that would be a headwind in the fight against high global inflation," Lomholt told Insider.

That's because a weak dollar spurs economic activity outside the US — fueling price pressures that could eventually filter back to America, putting more stress on the already tight labor markets.

Still, the dollar's recent declines are unlikely to raise the inflation alarm for US policymakers anytime soon, according to ING's Pesole.

"A weaker domestic currency is generally bad news for an economy that is trying to fight inflation," he said. "However, given how much the dollar strengthened in 2022, the recent decline is unlikely to sound the alarm at the Treasury's/Fed's and encourage more monetary tightening simply to support the currency."

Source:INSIDER

Risk Warnings and Investment Disclaimers

You understand and acknowledge that there is a high degree of risk involved in trading with strategies. Following any strategies or investment methodologies is the potential for loss. The content on the site is being provided by our contributors and analysts for information purposes only. You alone are solely responsible for determining whether any trading assets, or securities, or signal, or any other product is suitable for you based on your investment objectives and financial situation.

Quick Access to 7x24

Quick Access to More Editor-selected Real-time News

Full Access to Pro Video Channel

FastBull project team is dedicated to create exclusive videos

Real-Time Quotes

View more faster market quotes

More comprehensive macro data and economic indicators

Members have access to entire historical data, guests can only view the last 4 years

Member-only Database

Comprehensive forex, commodity, and equity market data

7x24

Real Time Quotes

Economic Calendar

Economic Calendar
Events
Holiday

Policy Rates

BANKS ACT (%) PREV (%) CPI (%)

English

简体中文

繁體中文

العربية

Home News Columns AI News Economic Calendar Quotes Videos Data Warehouse Analysis AI Signals Pro User Agreement Privacy Policy About Us

Risk Disclosure

The risk of loss in trading financial assets such as stocks, FX, commodities, futures, bonds, ETFs or crypto can be substantial. You may sustain a total loss of the funds that you deposit with your broker. Therefore, you should carefully consider whether such trading is suitable for you in light of your circumstances and financial resources.

No consideration to invest should be made without thoroughly conduct your own due diligence, or consult with your financial advisors. Our web content might not suit you, since we have not known your financial condition and investment needs. It is possible that our financial information might have latency or contains inaccuracy, so you should be fully responsible for any of your transactions and investment decisions. The company will not be responsible for your capital lost.

Without getting the permission from the website, you are not allow to copy the website graphics, texts, or trade marks. Intellectual property rights in the content or data incorporated into this website belongs to its providers and exchange merchants.

Russia-Ukraine Conflict

The Fed

China-U.S. Relations

FastBull Spotlights

FastBull Featured

FastBull

Devin

Winkelmann

Recent Searches