This past week’s Fed meeting and comments from Chairman Powell hinted at continued low-interest rates and a dovish stance to help the economy regain its footing in the current COVID-19 environment.
Historically low-interest rates have already made an impact on the economy via a tight housing market amid record mortgage applications, capital flooding into equity markets, and higher debt levels as borrowers respond to low financing costs.
The U.S. dollar index, a market index of the dollar’s relative strength against a broad basket of currencies, is used as a trade-weighted index measuring the dollar’s competitiveness. The big six currencies used in the index are the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. Although the inclusion of the Mexican peso and Chinese renminbi yuan would presumably improve the metric, the fact that Mexico is considered an emerging market with a highly commodity-related economy and strict controls over the Chinese currency precludes them from consideration.
A lesser talked about impact of relative strength of currency is the inflationary/deflationary influence on commodity prices. As one nation’s currency increases in value vs. others, its purchasing power naturally increases. Any commodity prices that are quoted in that currency can therefore depreciate and yet maintain a static value when priced in other currencies—as would be the case for exports to these countries.
Conversely, when a currency falls in value, it can represent an inflationary impact on commodities that are priced in the weakening currency.
Clearly, a weaker dollar supported some of the rise we are seeing in commodity prices this summer (world sugar, oil, cocoa, etc.). The dollar index has now fallen just over 4 percent since January and is down 10.5 percent from the highs seen in March during that month’s COVID-19 surge.
We are now trading at a near two-year low and the rate should continue to remain rock bottom based on comments in the Fed minutes released this past week.