Recently, the dollar hit its lowest point in the past three years. The U.S. Dollar Index (USDX/DXY) tracks the performance of the dollar against a basket of major currencies and on January 24, 2018 the greenback reached levels not seen since December 2014. 1 In short, the currency is in total free fall. 2 What’s behind this most recent dollar drops?
How bad is it, really? Only a full list of statistics can make it clear just how far the dollar has fallen:
- Down .38 percent over the past five days.
- Down 2.68 percent year-to-date.
- Down 2.93 percent over the past month.
- Down 5.39 percent over the past three months.
- Down 10.26 percent over the past year. 3
By any metric, this is dismal performance, and it only seems to be getting worse. A combination of political uncertainty both within the U.S. and internationally, such as the U.S. federal government shutdown, possible trade wars, the threat of war with North Korea, further trouble in the Middle East, and the growing sense of a stock market bubble is weighing on dollar strength. 4
The Trump administration asserts that a weaker dollar is good for the U.S. economy. In an interview from the World Economic Forum in Davos, Switzerland, Treasury Secretary Steve Mnuchin said that a weak dollar was good for the country. 5 ‘Obviously a weaker dollar is good for us as it relates to trade and opportunities,’ he told reporters, and that the dollar’s value short-term is ‘not a concern of ours at all.’ The dollar plummeted by 0.8 percent against the euro and 1 percent against the yen following his comments.
In truth, a weaker dollar is a mixed bag for the U.S. economy as a whole. While it is indeed good for exports, since it makes our goods and services cheaper to the rest of the world, it also makes imports more expensive. For businesses that rely on imports to sell to U.S. consumers, such as textiles or electronics, those goods are now more expensive. In the end, a weaker dollar can be quite inflationary, since it makes products sold in the U.S. more expensive.
Gold Prices Rising
The weaker dollar has only been adding fuel to the fire that is burning in gold and the precious metals complex. Gold prices are hitting record highs and the yellow metal shows no sign of slowing down. Since the drivers of a weaker dollar won’t be going away anytime soon, we can assume that 2018 is going to be a great year for gold!