Why Is the Dollar Falling?

The Fed just raised rates and conventional wisdom says the dollar should be going up. But according to Business Insider the dollar is tumbling. Why is the dollar falling?

The US dollar index is down by 0.6% at 99.82 as of 7:53 a.m. ET.

This is the lowest level for the index since early February.

The euro, pound, Mexican peso, rupee and ruble have all gained at the expense of the USD. What happened and why is the dollar falling?

Too Little, Too Late and Not Often Enough

According to Reuters the problem with the dollar is that the Fed says the rate hike pace will be gradual.

The dollar posted steep losses against major currencies on Wednesday after the Federal Reserve raised interest rates as expected but signaled a more gradual pace of monetary tightening this year than many in the market anticipated.

The Forex market had already priced in a more substantial set of rate increases than what the Fed is signaling. That is part of why the dollar is falling. And signals from the US economy are not helpful. PoundSterlingLive.com comments as the US dollar falls against the Pound Sterling. There is more that the number of interest rate bumps in this picture.

The Dollar had been seen falling ahead of the event on weaker-than-expected US retail sales data which outweighed the impact of a robust CPI figure.

The Fed will only raise rates as the economy warrants and that includes retail sales figures which were disappointing.

What Does the Future Hold for the Dollar?

Any long term dollar rally will depend on a greatly stimulated economy. First of all it is the economy that drives the currency. And when the economy starts to hum it brings on inflation and the job of the Fed is to fight inflation, primarily by raising interest rates. The economy may do well with Trump’s proposed plans to reduce taxes, repatriate offshore corporate cash and spend on infrastructure. However, whenever a party controls both houses of congress and the White House the tend to bicker among themselves and that is what is happening right now with the attempted repeal and replacement of the Affordable Care Act. If the rest of Trumps agenda plays out the same way don’t expect to see much economy growth and thus don’t expect to see a longer term dollar rally based on that growth.

And If There Is a Trade War

Trump’s talk of high tariffs on Chinese goods has cooled down but according to Bloomberg there is a 50% chance Trump will start a trade war with China.

There is a 50 percent chance Donald Trump could start a trade war with China, raising investment risks across emerging markets this year, according to Loomis Sayles & Co.

The threat of a trade spat between the world’s two biggest economies is “quite real” as the U.S. president pledges to protect American industry, said Lynda Schweitzer, vice president and portfolio manager at the investment firm that oversees $240 billion. While a clash isn’t a certainty, the chance has “got to be 50-50,” prompting the company to stay lukewarm toward emerging market debt investments, she said.

These folks are concerned about taking on emerging market debt because a trade war between China and the USA would have global ramifications and a substantial Forex impact on any and all currencies.