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Dollar plunges 7.4% in past six months — what it means
The U.S. dollar has been in quick decline over the past several months, one of several indicators raising fears that the economy could be headed for a recession.
Since a recent peak in early November, the greenback has fallen by 7.4%, according to the nominal broad U.S. dollar index. The falling dollar comes after a yearlong period of the Federal Reserve hiking interest rates in response to the country’s rip-roaring inflation.
And there are several reasons behind the decline. But to put the current situation into perspective, it must be noted that the dollar surged in value during the height of the Fed’s tightening so is in a way falling back to Earth from the highs notched last year.
Part of the dwindling power of the dollar is because, after a barrage of aggressive rate hikes, the United States is now entering a different phase of its monetary policy. Recent reports suggest that inflation is now meaningfully declining and the labor market is finally softening, as Fed officials have hoped. That means the central bank is likely to end its tightening either at its next meeting or at its June meeting.
“The Fed is now talking about pausing; the markets think that they’re going to be cutting interest rates. So we’re in a different stage of the interest rate cycle,” Desmond Lachman, senior fellow at the American Enterprise Institute, told the Washington Examiner.
While the Fed may be putting its foot on the brakes soon, other central banks, such as the European Central Bank, are continuing to raise interest rates.
Meanwhile, there are some signs that the U.S. business cycle may be turning negative. Jobless claims, a proxy for layoffs, have been trending up, a sign the rate hikes are beginning to corrode the red-hot labor market.
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