News Analysis: What's behind 3-year-low dollar index

Source: Xinhua| 2018-01-26 13:46:29|Editor: Shi Yinglun
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NEW YORK, Jan. 26 (Xinhua) -- The recent broad decline of the U.S. dollar against other major currencies results from shifting perceptions of monetary policies and overseas economic growth, rather than the less strong currency stance of the current administration, analysts said Thursday.

The dollar index dipped to a three-year low Thursday after U.S. Treasury Secretary Steven Mnuchin said at the World Economic Forum that the country welcomes a weaker dollar as it is better for the economy.

His remarks reminded the market of U.S. President Donald Trump's take of foreign exchange last year, that is a weaker dollar would help the United States reduce its large trade deficit.

Mnuchin's comments provided a new catalyst for dollar selling and raised questions about whether a weaker U.S. dollar could provide a long-term impetus for the economy.

International Monetary Fund (IMF) Managing Director Christine Lagarde said Thursday that Mnuchin should clarify exactly what he said and it is not time to have any kind of currency war.

European Central Bank President Mario Draghi emphasized the international commitment to avoid competitive devaluations and said Mnuchin's support for a weaker dollar could lead to unwanted tightening of monetary policy.

As if responding to international concerns, Trump told CNBC on Thursday that ultimately he wants to see a strong dollar and Mnuchin's remarks were taken out of context.

The dollar index quickly pared losses after Trump's comments came out, increasing to 89.379 in late trading.

Foreign exchange analysts, however, said there are more reasons for the dollar decline than the top U.S. leadership's words.

"We see dollar weakness resulting from a combination of factors that include waning monetary accommodation, the prospect of higher policy rates abroad, and investment in foreign markets and assets as economic growth accelerates in the Euro-zone and Japan," said Humberto Garcia, head of Global Asset Allocation for Bank Leumi USA.

He told Xinhua that incipient tapering of monetary accommodation at major international central banks such as the Bank of England, the European Central Bank and the Bank of Japan is likely the biggest factor affecting the value of the dollar. The expectation of rate hikes abroad as reflation begins may also have an influence.

Echoing Garcia, Robert Savage, CEO of CC Track Solutions, said compared with the U.S. central bank, the European Central Bank has better growth than expected, fewer political concerns and more room to raise rates.

Looking forward, analysts said the dollar might stay on the downward trajectory, but not as steep as the market saw in January.

"Our foreign currency experts point out that the magnitude of foreign central bank asset purchases and tapering is likely offsetting the influence of U.S. rate hikes," said Garcia.

He pointed out that the dollar hardly moved after the last Federal Reserve rate hike, signaling that the market had already priced in the additional quarter-percent. The Federal Reserve's open communications seem to be working well.

"New Fed Chairman Jerome Powell has indicated he intends to maintain the slow moving and supportive stance that the Fed has held in recent years. Hence, foreign QE tapering may continue to weigh more heavily on the dollar than U.S. rates going forward," said Garcia.