All eyes are on the Fed’s policy meeting this week, but it will be essential to some battered commodity currencies hoping for relief from a weaker dollar. Investors are zeroing in on the currencies of countries that produce oil and other raw materials, such as Norway and Australia, betting that a recovery in commodity prices will lift these currencies back toward fair value against the Dollar. The Norwegian krone NOK= and the Australian dollar AUD= have already declined about 2% from their recent highs.
Many investors blame the Dollar’s fall on the Federal Reserve’s rate-hiking cycle, which has sucked up funds that would otherwise be invested in commodities. But a more subtle force also has been at work. The Dollar’s worth as a global currency is defined not by the U.S. government’s backing but by how much foreign currency it can purchase. For example, one Dollar can buy more than a euro or a Japanese yen because those two currencies have weakened against the Dollar.
A strong Dollar reflects an economy with a healthy domestic market and low-interest rates, and it can be a magnet for overseas investments. But a weak Dollar can signal economic weakness or rising inflation, leading to higher prices for goods from abroad.
Several catalysts could drive the Dollar lower still, including more signs of cooling inflation. Recent producer-price data showed the pace of U.S. inflation slowed in June, and consumer-price figures are expected to show the same.
Cooling inflation could also lift expectations for growth outside the United States, particularly in China, where leaders inch closer to lifting harsh restrictions on travel and business activity that helped drive the Pandemic Dollar’s decline last year.
The Dollar’s slump has spotlighted its less-loved peers, including the Norwegian krone, the Australian Dollar, and the New Zealand dollar. Analysts consider All of those currencies undervalued based on their terms of trade or gross domestic product relative to the Dollar. The exception is the South African rand, which has benefited from a rally in commodity prices and political hopes that the country will avoid an economic crisis.
Analysts believe the Dollar’s decline may be over. However, some warn of a further correction next year as investors reassess their expectations for the U.S. economy and the Fed’s rate-hiking cycle. The market is already skeptical about the chances of a September hike, according to IG’s Lucas, and most economists see no need for a hike until early 2016. That leaves room for more Dollar weakness. And that might be the correct medicine for some battered commodity currencies. The Dollar slipped to a three-week low against the euro on Monday and fell to a seven-year low against the Swiss franc. The Dollar has also lost ground against the Japanese yen and the British pound. A stronger Dollar means that foreign investments in those countries are more expensive, increasing the costs of imported goods for consumers.
