What is happening with the dollar?

Behind the Vast Market Rally: A Tumbling Dollar

The dollar has made a sharp U-turn this summer following a long rally, confounding many traders but potentially adding fuel to this year’s surprising stock-market rebound. The ICE Dollar Index, which measures the dollar against a basket of other major currencies, in July notched its worst month in nearly a decade and recently hit a two-year low. The fall extended a reversal that began in late March, spurred lately by ballooning worries that mounting coronavirus cases will stall the U.S. economic rebound, even as growth accelerates in countries from China to Germany.

Big-name investors such as Ray Dalio and Jeffrey Gundlach have recently said publicly that the flood of U.S. government spending being injected into the financial system could eventually stoke inflation, eroding consumers’ purchasing power. Surging budget deficits tend to make investors less likely to hold a country’s currency. Fitch Ratings on Friday revised its credit rating outlook for the U.S. to negative from stable, though it maintained its top, triple-A rating.

At the same time, the currency’s slide is adding further support to the booming market rally, lifting stocks and commodities. A weaker dollar boosts multinational companies, which see their products get more competitive abroad and can more easily convert overseas profits into dollars. It also makes products and investments that are priced in the currency cheaper for overseas investors, supporting demand for a host of financial assets. U.S. stocks have climbed near five-month highs recently, while raw materials are paring much of their 2020 decline.

“These things are denominated in dollars, and the dollar is getting crushed,” said Christopher Stanton, chief investment officer of Sunrise Capital Partners. He expects the trend to continue and is directly wagering against the currency, betting on gains in the euro against the dollar and buying gold, which some investors are using as an alternative store of value. Gold recently climbed to all-time highs for the first time since 2011.The dollar’s decline upends a yearslong climb that was fueled by bets that U.S. economic growth would outpace activity overseas and let the Federal Reserve keep interest rates among the highest in the developed world. Now, the coronavirus is forcing the central bank to keep rates near zero, slicing much of the gap between rates in the U.S. and other nations and limiting investor returns from holding the currency.