The US Dollar Falls
The US dollar (DX=F) retreated further from near two-year highs on Friday, reaching a one-month low. President Trump's statement that he would "rather not" impose tariffs on China contributed to the decline.
US Dollar Index
The US Dollar Index, which measures the dollar's value against a basket of six foreign currencies, fell over 0.5% on Friday, marking its worst weekly performance in over a year. The greenback experienced its largest one-day drop since November 2023 earlier this week when Trump refrained from enacting broad-based tariffs on his first day in office.
Trump's Tariff Policy
The uncertainty surrounding Trump's tariff policy has been a significant driver of the dollar's value in recent weeks and is expected to continue into the future. Analysts at Bank of America anticipate that the market will continue to price in tariff risk for the dollar, even if tariffs are delayed.
Dollar's Rise
Despite the recent decline, the US dollar has gained around 7% since its September lows and 4% since Election Day. The dollar's strength has been primarily driven by Trump's election and the subsequent Republican sweep, as well as the recalibration of future Fed easing in light of strong economic data.
Strong Dollar Impacts
A strong US dollar can adversely impact US businesses that generate most of their revenue overseas, as it can lead to slower earnings growth due to unfavorable foreign exchange conversions. Companies have already expressed concerns about this issue, with Netflix reporting that 60% of its revenue comes from non-US dollar currencies.
Long-Term Consequences
While a strong dollar can provide benefits in the short term, Capital Economics warns that it could create problems for the world economy in the future. Tightened global financial conditions, increased inflation overseas, and pressured exports are among the potential consequences of a high dollar value.