Dec 9, 2022 - Economy

Greenback's slump could signal good news for economy

U.S. dollar index
Data: FactSet; Chart: Axios Visuals

After hitting a 20-year high this fall, the dollar is now weakening fast.

Driving the news: The U.S. dollar index — which tracks the buck against a basket of six other major currencies — is down more than 8% from its September peak.

  • That's the most the dollar has fallen in a roughly 10-week time frame in over a decade.

Why it matters: The drop suggests markets now think the worst of the recent inflation is over, and therefore the Fed can soon start to slow down or even stop its rate-hiking program.

The big picture: Like pretty much everything in the markets this year, the dollar's rally — it was up nearly 19% at one point — is tied to the aggressive interest rate hikes the Fed imposed to try to rein in inflation.

  • Currencies fluctuate for a bunch of reasons. But some of the most important drivers are known on Wall Street as "interest rate differentials." These are basically the gaps between interest rates imposed by central banks in different countries.
  • When a central bank in one country is raising its monetary policy rates and a central bank in another country is not, the former's higher rates act as a magnet pulling capital into that country's currency.
  • In other words, a currency usually gets stronger when that nation's central bank is on a hiking spree. That's basically the story of the greenback in 2022.

Yes, but: Over the last couple months, the dollar started to tumble on news suggesting the Fed might not keep raising rates as fast as it has been.

What we're watching: Next week's Fed meeting on Wednesday and whether Powell & Co. make the dovish pivot that many clearly expect.

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