The U.S. dollar is in decline, and that could have far-reaching implications for Wall Street, at a time when concerns about geopolitical tensions, anemic inflation, meteorological and geological phenomena, and lofty valuations in stocks and bonds seem to be reaching crescendo.
And that names just a few of the factors that are ostensibly weighing on market sentiment and taking a toll on the world’s reserve currency.
Indeed, the ICE U.S. Dollar Index, which gauges the greenback’s strength against a basket of six currencies with a heavy tilt against Europe’s euro EURUSD, +0.1081% is down 11.5% since reaching 103.21 on Jan. 3. That qualifies the currency gauge’s recent slide as a correction, which is defined as a drop of at least 10% from a recent peak.
Signs point to further weakness.
The buck, trading around its lowest level since January 2015, has stumbled beneath short- and long-term trend lines that chart watchers tend to track to determine bullish and bearish momentum in an asset. In this case, the buck is off 7.2%, compared with its 200-day moving average of 98.49, and it’s 2.6% below its 50-day moving average at 93.83.
Moreover, the index’s 50-day moving average has crossed below the asset’s 200-day moving average—a pattern that took shape around mid-May and may represent what market technicians refer to as a death cross, another decidedly bearish sign.
But what does this all mean? And why is the dollar in a slump, despite a U.S. economy that appears to be growing, albeit moderately?
In theory, a falling dollar makes U.S. goods more competitive abroad. Dollar weakness also appears to be favored by President Donald Trump and his Treasury Secretary Steven Mnuchin. Multinational companies, including Apple Inc. AAPL, -1.63% Nike Inc. NKE, -0.36% and Coca-Cola Co. KO, +0.04% can offer goods and services internationally at more attractive prices, which should show up in their quarterly sales figures.
However, there is a limit to the benefits of a softer dollar. Trump and company may view the buck as part of policy objective to boost trade in U.S. goods, but a weakening greenback can also sound an alarm among consumers, companies and market participants.