The US dollar’s coming slide will be welcomed by the world

THE US dollar has lost some of its lustre over the winter. The twin supports of its status as the preferred haven during the pandemic and being backed by the world’s strongest economy are fading. And now another prop for the greenback is wobbling, amid doubts about how much higher the Federal Reserve will raise US interest rates as it has second thoughts on the likelihood of a recession. The greenback looks likely to suffer an extended bout of weakness.  

This has no bearing on the US dollar’s unrivalled position as the global reserve currency: King Dollar sits serenely on its throne. But what’s not so good for the currency’s relative value is better for the rest of the world, because less focus is needed on keeping up with the US dollar. This has led to oversized interest rate hikes to shore up currency valuations, above and beyond what monetary policy has needed to do to address specific domestic requirements on fighting inflation. 

This shift is helping to correct a serious imbalance, known as the dollar smile, that had skewed too much in the favour of the US currency for much of this decade. We are likely more towards the base of the smile’s curve, where the US dollar weakens steadily, as opposed to the raised sides when monies flow in on either a flight to quality or the perception that returns in America will be superior to those available elsewhere.